Issue
Is the taxpayer entitled to a deduction under section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997) for a foreign loss incurred with regard to a foreign rental property?
Decision
No. The taxpayer is not entitled to a deduction under section 8-1 of the ITAA 1997 for a foreign loss incurred with regard to a foreign rental property as foreign losses relating to a class of foreign income can only be offset against foreign income of the same class.
Facts
The taxpayer is an Australian resident for tax purposes.
The taxpayer owns a rental property in a foreign country.
The taxpayer is assessable on the foreign rental income received. The taxpayer's deductible expenses exceed the income from the property.
The foreign loss was incurred by the taxpayer in a year of income between the 1990 and 2001 income years.
The taxpayer has no other income from a foreign source although they do have income from Australian sources.
Reasons for Decision
Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.
Paragraph 8-1(2)(d) of the ITAA 1997 provides that a deduction will not be allowed where another provision of the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 prevents it.
Under section 79D of the ITAA 1936 where a taxpayer incurs foreign income deductions in relation to a class of assessable foreign income, and the amount of these deductions exceeds the amount of foreign assessable income of that class, then the deduction to be allowed is limited to the amount of income received.
Subsection 79D(2) of the ITAA 1936 provides that 'class of assessable foreign income' has the same meaning as in section 160AFD of the ITAA 1936.
Under subsection 160AFD(8) of the ITAA 1936 each of the following kinds of assessable foreign income constitutes a single class: (a) interest income; (b) modified passive income; (c) offshore banking income; and (d) all other assessable foreign income.
Subsection 160AEA(2) of the ITAA 1936 defines modified passive income as passive income excluding interest income. Paragraph 160AEA(1)(g) of the ITAA 1936 provides that rental income is passive income and therefore it will be modified passive income for the purposes of subsection 160AFD(8) of the ITAA 1936.
The taxpayer's foreign rental property income is from the modified passive income class. Under section 79D of the ITAA 1936 the taxpayer's deduction for foreign rental property expenses is limited to the amount of modified passive income received. The foreign loss is therefore not deductible under section 8-1 of the ITAA 1997 in the current income year as section 79D of the ITAA 1936 prevents the deduction.
However, foreign losses can be carried forward indefinitely for the 1990 and later years of income and used to reduce net modified passive income received by the taxpayer in future years. Note: The operation of section 79D of the ITAA 1936 has been amended with effect from 1 July 2001. Expenditure incurred on or after 1 July 2001 which qualifies as a 'debt deduction' within the meaning of section 820-40 of the ITAA 1997 and which is not attributable to an overseas permanent establishment of the taxpayer is no longer quarantined. A 'debt deduction' is, broadly, a deductible expense incurred in servicing and maintaining debt finance and includes interest and other related expenses.