Assessability of UK rental income - Australian resident taxpayer

Is income derived by an Australian resident taxpayer from a rental property in the United Kingdom (UK), included in the assessable income of the taxpayer under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Income derived by an Australian resident taxpayer from a rental property in the UK, is included in the assessable income of the taxpayer under section 6-5 of the ITAA 1997.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer owns an investment property in the UK.

The taxpayer earns rental income from the property.

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.

Real property that generates income and is located in the UK is subject to tax in the UK as the income is regarded as being derived from the place at which the property is located. However, agreements that Australia has with various countries under the International Tax Agreements Act 1953 (the Agreements Act) operates to prevent the double taxation of income.

Subparagraph 19(2)(a) of Schedule 1 to the Agreements Act provides that a credit shall be allowed against Australian tax assessed for UK tax payable by a resident of Australia from sources in the UK.

The Australian resident taxpayer has derived income from a rental property in the UK on which tax is payable in the UK. Although subject to tax in the UK, the income is also assessable in Australia under section 6-5 of the ITAA 1997 as a resident taxpayer's assessable income includes ordinary income from all sources whether in or out of Australia. However, the taxpayer will be entitled to a foreign tax credit for the tax paid in the UK on the rental income.