Assessability of rental income received from Germany - foreign tax credits

Does rental income 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 rental 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 owns a property in Germany from which they received rental income.

The taxpayer has paid tax on this income in Germany.

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 rental 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 6 of the German Agreement provides that the German taxation authorities have the right to tax any rental income that is derived from a rental property situated in Germany and paid to a resident of Australia. The German Agreement does not exclude the rental income from being taxable in Australia. The rental income may therefore be taxed in both countries.

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 rental 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 rental income a foreign tax credit will be allowed. Note: If the German tax paid on the rental income is less than the Australian tax payable the taxpayer will be entitled to a full credit for the German tax paid. 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 rental income.