ATO ID 2003/141: Assessability of interest from term deposit in India
Date of decision: 5 February 2003
Year of income: Year ended 30 June 2002 Year ending 30 June 2003 Year ending 30 June 2004
Business line: Public Groups and International

Issue
Is the interest income derived by a resident taxpayer from sources in India assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The interest income derived by a resident taxpayer from sources in India is assessable under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is a resident of Australia for income tax purposes. The taxpayer has invested in India a sum of money in a term deposit account denominated in a foreign currency. The taxpayer derives interest income from the term deposit account. The taxpayer is unable to use the money in Australia due to foreign currency restrictions. The taxpayer can access the money only in India.

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. Under subsection 6-5(4) of the ITAA 1997 a taxpayer is taken to have received an amount of ordinary income when the amount is applied or dealt with in any way on the taxpayer's behalf or as the taxpayer directs. 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 (the 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Schedule 35 to the Agreements Act contains the double tax agreement between Australia and the Republic of India (the Indian Agreement). The Indian Agreement operates to avoid the double taxation of income received by Australian and Indian residents. Paragraph (1) of Article 11 of the Indian Agreement provides that interest arising in India, to which a resident of Australia is beneficially entitled, may be taxed in Australia. Under paragraph (2) of Article 11 of the Indian Agreement, interest from sources in India may also be taxed in India but the rate of tax is not to exceed 15% of the gross amount. Sub-paragraph (1)(a) of Article 24 of the Indian Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in India will be allowed against Australian tax payable on income from sources in India. Although the taxpayer is unable to use the money in Australia due to foreign currency restrictions, the taxpayer is taken to have received the interest income when the interest is credited to the term deposit account or dealt with in any way as the taxpayer has directed. Accordingly, the taxpayer's assessable income includes the interest derived from India under subsection 6-5(2) of the ITAA 1997. If the Indian tax has been paid in relation to this interest, a foreign tax credit will be allowed. If the Indian tax paid on the interest is less than the Australian tax that will be payable, then the taxpayer will be entitled to a full credit for the Indian tax paid.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2) subsection 6-5(4)
Related ATO interpretative decisions: ATO ID 2002/886
Subject references: Double tax agreements Foreign income Foreign tax credits India Interest income International tax