Assessability of interest income from Germany - foreign tax credits

Does interest received from Germany form part of an Australian resident taxpayer's assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. As the taxpayer is a resident of Australia, they are required to include the interest income in their assessable income under section 6-5 of the ITAA 1997 but a foreign tax credit will be allowed for the foreign tax paid.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer has invested funds in Germany and receives interest income.

Tax at the rate of 10% has been deducted from that interest income by the German taxation authorities.

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 section 6-5 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).

Schedule 9 to the Agreements Act contains the double tax agreement between Australia and Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 11 of the German Agreement provides that the German taxation authorities have the right to deduct tax at a rate of 10% of the gross amount from interest income derived from Germany and paid to a resident of Australia.

Paragraph (1) of Article 22 of the German Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Germany will be allowed against Australian tax payable on income from German 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 German interest income received by the taxpayer forms part of their assessable income under section 6-5 of the ITAA 1997. As German tax has been paid in relation to this interest a foreign tax credit will be allowed. As the German tax paid on the interest is less than the Australian tax payable the taxpayer will be entitled to a full credit for the German tax paid. Note: Where the German 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 German tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign interest income.