Assessability of interest received from Switzerland - foreign tax credits

Is the interest income received by a resident taxpayer from sources in Switzerland assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The interest income received by a resident taxpayer from sources in Switzerland is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for tax purposes.

The taxpayer received interest income from a source in Switzerland.

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 during the income year.

As the taxpayer is a resident of Australia the interest income forms part of their assessable income under 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 15 to the Agreements Act contains the double tax agreement between Australia and Switzerland (the Swiss Agreement). The Swiss Agreement operates to avoid the double taxation of income received by Australian and Swiss residents.

Paragraph (1) of Article 11 of the Swiss Agreement provides that if interest from sources in Switzerland is received by an Australian resident then it may be taxed in Australia.

Under paragraph (2) of Article 11 of the Swiss Agreement interest from sources in Switzerland may also be taxed in Switzerland but the rate of tax is limited to 10 per cent of the gross amount.

Paragraph (1) of Article 22 of the Swiss Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Switzerland will be allowed against Australian tax payable on income from sources in Switzerland.

The Swiss interest income received by the taxpayer forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. If Swiss tax is paid in relation to this interest, a foreign tax credit will be allowed. If the Swiss tax is less than the Australian tax that will be payable then the taxpayer will be entitled to a full credit for the Swiss tax paid.