ATO ID 2004/127: Assessability of Australian sourced interest income received by a Netherlands resident
Date of decision: 22 January 2004
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009
Business line: Public Groups and International

Issue
Is Australian sourced interest income received by a Netherlands resident taxpayer assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Australian sourced interest income received by a Netherlands resident taxpayer is not assessable under subsection 6-5(3) of the ITAA 1997 as it is exempt under section 128D of the Income Tax Assessment Act 1936 (ITAA 1936).

Facts
The taxpayer is a resident of the Netherlands. The taxpayer receives interest income from Australian sources.

Reasons for decision
Summary: Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. Interest is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997. Section 6-15 of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income. An amount is exempt income if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law (subsection 6-20(1) of the ITAA 1997). Section 11-10 of the ITAA 1997 lists provisions about exempt income. Included in this list is section 128D of the ITAA 1936. Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable shall not be included in assessable income. A non-resident is liable for withholding tax on interest under subsection 128B(2) of the ITAA 1936. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that the rate of withholding tax on interest paid to non residents is generally 10%. In determining liability to Australian tax on Australian sourced income received by a non-resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Schedule 10 to the Agreements Act contains the agreement between Australia and the Netherlands (the Netherlands Agreement). Schedule 10A to the Agreements Act contains the Second Protocol to the Netherlands Agreement (the Second Protocol). The Netherlands Agreement and the Second Protocol operate to avoid the double taxation of income received by residents of Australia and the Netherlands. Article 11(1) of the Netherlands Agreement states that interest arising in Australia, being interest to which a resident of the Netherlands is beneficially entitled, may be taxed in the Netherlands. Article 11(2) of the Netherlands Agreement states that such interest may be also taxed in Australia and according to the law of Australia, but the tax so charged shall not exceed 10 percent of the gross amount of interest. Therefore, the taxpayer's interest income may be taxed in the Netherlands and in Australia. Subsection 128B(2) of the ITAA 1936 provides that the taxpayer will be subject to 10% withholding tax on the gross amount of interest derived from Australia. As the interest is subject to withholding tax, it is exempt under section 128D of the ITAA 1936. Accordingly, the interest received by the taxpayer from Australian sources that is subject to withholding tax will not form part of their assessable income under subsection 6-5(3) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(3) section 6-15 subsection 6-20(1) section 11-10
Subject references: Interest income International tax Netherlands Non resident interest withholding tax