ATO ID 2005/207: Assessability of rental income received from real property situated in the United Kingdom (UK) by a dual resident of Australia and the UK
Date of decision: 1 July 2005
Year of income: Year ended 30 June 2005 Year ended 30 June 2006 Year ended 30 June 2007
Business line: Public Groups and International

Issue
Is rental income received by a taxpayer who is a dual resident of Australia and the United Kingdom (UK) from real property situated in the UK included in the taxpayer's assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. Rental income received by a taxpayer who is a dual resident of Australia and the UK from real property situated in the UK is not included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is a resident of Australia for taxation purposes. The taxpayer is a resident of the UK for taxation purposes. The taxpayer maintains residences in Australia and the UK which is available to the taxpayer at all times continuously. The taxpayer spends time in Australia and the UK during the year. The taxpayer's personal and economic ties are predominantly in the UK. The taxpayer receives rental income from real property situated in the UK.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Rental 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 double tax agreement 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 ITAA 1997 so that those Acts are read as one. Schedule 1 to the Agreements Act contains the double tax convention between Australia and the UK (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents. As the taxpayer is a dual resident of Australia and of the UK, it is necessary to consider the tie breaker rules in the 2003 UK Convention. Article 4(3) of the 2003 UK Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the 2003 UK Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. Article 4(3) of the 2003 UK Convention provides that if an individual is a resident of both Australia and UK, they shall be deemed to be a resident of the State: The terms 'permanent home' and 'personal and economic relations' are otherwise undefined in the 2003 UK Convention. Article 3(3) of the 2003 UK Convention provides that any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law relating to taxes of the country applying the 2003 UK Convention. Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 of TR 2001/13 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements. The OECD Commentary provides that in relation to a 'permanent home': As the taxpayer maintains residences in both countries which are available at all times continuously for the taxpayer's permanent use, the taxpayer has a permanent home in Australia and in the UK. In relation to a taxpayer's personal and economic relations, the OECD Commentary provides that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business. The taxpayer's personal and economic ties are closer with the UK than with Australia. Accordingly, the taxpayer will be treated as a resident of the UK for the purposes of applying the provisions of the 2003 UK Convention. Article 6(1) of the 2003 UK Convention provides that income from real property may be taxed by the country in which such real property is situated. While Article 6(1) of the 2003 UK Convention allocates a non-exclusive taxation right to the UK based on the location of the real property (that is, its source), it does not expressly address Australia's taxation rights. Paragraph 23 of Taxation Ruling 2001/13 provides guidance on the interpretation of the phrase 'may be taxed' in an article of a double tax agreement (DTA): What the phrase 'may be taxed' normally means is that the country mentioned (the source country) has a non-exclusive entitlement to tax the income. Under normal international tax principles, the other (residence) country may also continue to tax its residents (where its domestic law so provides) on the income, wherever sourced, unless the DTA explicitly prevents it from doing so. This supports the view that Article 6(1) of the 2003 UK Convention provides the residence country with a taxing right. Accordingly, where both the country of source and country of residence for treaty purposes are the same, the other Contracting State is prevented from taxing the income because it has not been allocated a taxing right. Accordingly, Article 6(1) of the 2003 UK Convention prevents Australia from taxing rental income derived from real property situated in the UK by a taxpayer who is treated solely as a resident of the UK under the tie-breaker rules in Article 4(3) of the 2003 UK Convention. Therefore, the UK sourced rental income received by the taxpayer does not form part of the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2)
Related public rulings and determinations: Taxation Ruling TR 2001/13
Other references: OECD Model Tax Convention and Commentary
Subject references: Foreign source income Income tax International tax Rental property income United Kingdom