Assessability of a capital gain from property sold in Spain - foreign tax credits

Is the taxpayer, a resident of Australia, assessable on a capital gain which arises from the sale of property in Spain under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer, a resident of Australia, is assessable on a capital gain which arises from the sale of property in Spain under section 6-10 of the ITAA 1997 but a foreign tax credit will be allowed for foreign tax paid.

The taxpayer is an Australian resident.

The taxpayer owned real property in Spain. This property was sold during the income year and the taxpayer received a net capital gain.

The taxpayer paid Spanish tax on the amount of the net capital gain.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia. (subsection 6-10(4) of the ITAA 1997)

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 102-5 of the ITAA 1997 which provides that a net capital gain is to be included in assessable income.

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 ITAA 1997 so that those Acts are read as one. The Agreement Act effectively overrides that ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 39 of the Agreements Act contains the double tax agreement between Australia and Spain (the Spanish Agreement). The Spanish Agreement operates to avoid the double taxation of amounts received by Australian and Spanish residents.

Article 13 of the Spanish Agreement deals with alienation of property. Paragraph (1) of Article 13 provides that income or gains derived by a resident of Australia from the alienation of real property situated in Spain may be taxed in Spain. The Spanish Agreement does not exclude the net capital gain from being taxed in Australia and it may therefore be taxable in both countries.

Paragraph (1) of Article 23 of the Spanish Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Spain will be allowed against Australian tax payable on income from Spanish sources.

Subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that where the assessable income of a resident contains foreign sourced income and foreign tax has been paid on that income a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: • the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or • the amount of Australian tax payable in respect of the foreign income.

The net capital gain received by the taxpayer forms part of their assessable under section 6-10 of the ITAA 1997. As foreign tax has been paid in relation to this net capital gain a foreign tax credit will be allowed. Note: If the foreign tax paid on the net capital gain is less than the Australian tax payable the taxpayer will be entitled to a full credit for the foreign tax paid. Where the foreign tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess foreign tax paid. However, any excess foreign tax credit may be carried forward for a maximum of five years for application against future tax payable on the taxpayer's foreign income provided the requirements of section 160AFE of the ITAA 1936 are met.