ATO ID 2004/140: Assessability of interest income received by a dual resident of Australia and the United States
Date of decision: 21 November 2003
Year of income: Year ended 30 June 2003 Year ended 30 June 2004 Year ended 30 June 2005
Business line: Public Groups and International

Issue
Is the interest income of a dual resident of Australia and the United States (US) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
No. The interest income of a dual resident of Australia and the US is not assessable under subsection 6-5(2) of the ITAA 1997 as they are deemed to be a resident of the US for the purposes of the US double tax Convention.

Facts
The taxpayer is a citizen of the US. The taxpayer is a resident of Australia for taxation purposes. The taxpayer is a resident of the US for taxation purposes. The taxpayer's habitual abode and personal and economic ties are in the US. The taxpayer receives interest income from US sources.

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 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 the 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 agreement between Australia and the US (the US Convention). The US Convention operates to avoid the double taxation of income received by Australian and US residents. As the taxpayer is a dual resident, it is necessary to consider the tie breaker rules in the US Convention. Article 4(2) of the US 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 US Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. Article 4(2) of the US Convention provides that if an individual is a resident of both Australia and the US, they shall be deemed to be a resident of the State: As the taxpayer's habitual abode and personal and economic ties are in the US, the taxpayer will be considered a resident of the US under the US Convention. Article 11(1) of the US Convention provides that interest income arising in the US, to which a resident of Australia is beneficially entitled, may be taxed in Australia. As the taxpayer is resident of the US under the US Convention, Article 11(1) does not give Australia any taxing rights on the taxpayer's US sourced interest income. Accordingly, the US sourced interest income received by the dual resident taxpayer does not from 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)
Subject references: Double tax agreements Interest income International law Residency Treaties United States