ATO ID 2006/70: Assessability of interest income received from the Netherlands
Date of decision: 27 February 2006
Year of income: Year ended 30 June 2002 onwards
Business line: Public Groups and International

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

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

Facts
The taxpayer is a resident of Australia for taxation purposes. The taxpayer receives interest income from Netherlands sources. The taxpayer does not carry on business through a permanent establishment in the Netherlands. Tax is withheld on the interest income in the Netherlands.

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. 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 ITAA 1997 so that those Acts are read as one. Schedule 10 to the Agreements Act contains the tax treaty and the protocol between Australia and the Kingdom of the Netherlands (the Netherlands Agreement). Schedule 10A to the Agreement Act contains the Second Protocol to the Netherlands Agreement (the Second Protocol). The Netherlands Agreement and the Protocols operate to avoid the double taxation of income received by Australian and Netherlands residents. Article 11(1) of the Netherlands Agreement provides that interest income arising in the Netherlands, to which a resident of Australia is beneficially entitled, may be taxed in Australia. Article 11(2) of the Netherlands Agreement provides that the interest income may be taxed in the Netherlands, but the rate of tax charged shall not exceed 10% of the gross amount of the interest income. Article 23(1) of the Netherlands Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the Netherlands will be allowed against Australian tax payable on income from Netherlands sources. As the taxpayer is a resident of Australia, the interest income received by the taxpayer from the Netherlands forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. As the Netherlands tax has been paid in relation to the interest income, a foreign tax credit will be allowed subject to the Australian foreign tax credit rules.

Legislative references: Income Tax Assessment Act 1997 subsection 6-5(2)
Subject references: Double tax agreements Foreign income Foreign tax credits Interest income International law Netherlands Treaties