ATO ID 2007/76: Assessability of interest income sourced from Sri Lanka received by an Australian resident
Date of decision: 18 September 2006
Year of income: Year ended 30 June 2006 Year ended 30 June 2007
Business line: International Centre of Expertise

Issue
Is the interest income received by an Australian resident taxpayer from bank accounts located in Sri Lanka assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The interest income received by an Australian resident taxpayer from sources in Sri Lanka is assessable income under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is an Australian resident for income tax purposes. The taxpayer receives interest income from bank accounts in Sri Lanka.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Interest income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one. Schedule 31 to the Agreements Act contains the double tax agreement between Australia and the Democratic Socialist Republic of Sri Lanka (the Sri Lankan Agreement). The Sri Lankan Agreement operates to avoid the double taxation of income received by Australian and Sri Lankan residents. Article 11(1) of the Sri Lankan Agreement provides that interest from sources in Sri Lanka, to which a resident of Australia is beneficially entitled, may be taxed in Australia. Article 11(2) of the Sri Lankan Agreement provides that the interest income may also be taxed in Sri Lanka. However, the rate of tax shall not exceed 10 percent of the gross amount of interest. Article 23(1) of the Sri Lankan Agreement provides that a credit against Australian tax for tax paid in Sri Lanka shall be allowed (in accordance with the law of Australia) where tax has been paid under Sri Lankan law and in accordance with the Sri Lankan Agreement. Subsection 770-10(1) of the ITAA 1997 provides that where the assessable income of a resident contains foreign income and foreign income tax has been paid on that income, a tax offset will be allowed subject to a limit. Subsection 770-75(2) provides that the offset limit is the greater of $1,000. and the total amount of Australian income tax that is payable by the taxpayer in the income year less the amount of tax that would be payable in the income year if certain assumptions were made. As the taxpayer is a resident of Australia, the interest income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. Where Sri Lankan tax is paid in relation to this interest income, a foreign income tax offset may be allowed.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2) subsection 770-10(1) subsection 770-75(2)
Subject references: Double tax agreements Foreign income Foreign tax credits Interest income International tax Sri Lanka Treaties