Calculation of a prior year loss for a non resident

Is Australian sourced interest income derived by a non resident included in their assessable income for the purposes of calculating a tax loss under section 36-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Australian sourced interest income derived by a non resident is not included in their assessable income for the purposes of calculating a tax loss under section 36-10 of the ITAA 1997.

The taxpayer is a resident of Australia for tax purposes in the current year of income.

The taxpayer was a non resident in the immediate prior income year, which as after the 1997 year of income.

While a non resident, the taxpayer owned a rental property in Australia.

The rental property incurred a tax loss in the immediate prior income year.

The taxpayer also earned Australian sourced interest income while a non resident and withholding tax was deducted from that interest.

A tax loss is calculated under section 36-10 of the ITAA 1997. That section provides that the tax loss is calculated by subtracting the taxpayer's total assessable income from the total of the amounts that they are able to deduct for the income year (except any losses from earlier income years).

Subsection 36-10(3) of the ITAA 1997 provides that if the taxpayer derived exempt income then the taxpayer must also subtract their net exempt income to determine their tax loss.

The assessable income of a non resident includes income from Australian sources (subsection 6-5(3) of the ITAA 1997). Amounts of Australian sourced interest and dividends are subject to withholding tax and are exempt income of a non resident taxpayer (section 128D of the Income Tax Assessment Act 1936 ) and therefore does not form part of their assessable income.

Net exempt income is defined in section 36-20 of the ITAA 1997. Paragraph 36-20(2)(a) of the ITAA 1997 provides that the net exempt income of a non resident does not include exempt income which is subject to withholding tax.

As the interest income received by the taxpayer was subject to withholding tax it does not form part of their assessable income nor their net exempt income for the purposes of calculating their tax loss under section 36-10 of the ITAA 1997.