ATO ID 2003/718: Assessability of rental income from real property situated in the United States of America
Date of decision: 28 July 2003
Year of income: Year ended 30 June 2002
Business line: Public Groups and International

Issue
Is the rental income received by an Australian resident taxpayer from a real property located in the United States of America (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The rental income received by an Australian resident taxpayer from a real property located in the US 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 owns real property located in the US. The taxpayer receives rental income from that property. The taxpayer did not pay income tax in the US as the taxpayer made an overall loss from the renting out of the property.

Reasons for decision
Summary: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer 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 (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 2 to the Agreements Act contains the double tax convention between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid double taxation of income received by Australian and US residents. Article 6(1) of the US Convention provides that income from real property may be taxed by the country in which the real property is situated. Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' normally means the source country has a non-exclusive entitlement to tax the income. However, the country of residence of the taxpayer may also tax the income subject to the laws of that country, unless the double tax agreement explicitly prevents it. Accordingly, the rental income received by the Australian resident taxpayer from the real property located in the US is assessable under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 section 79D
Related public rulings and determinations: Taxation Ruling TR 2001/13
Subject references: Double tax agreements International tax Rental property Rental property income United States