Issue
Is the rental income received by an Australian resident taxpayer from real property situated in the People's Republic of China (China), assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The rental income received by an Australian resident taxpayer from real property situated in China is assessable under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer owns real property that is situated in China.
The taxpayer receives rental income from that property.
Reasons for Decision
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, whether in or out of Australia, during the income year.
Rental income is ordinary income for the purposes of 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 the ITAA 1997 so that those Acts are read as one.
Schedule 28 to the Agreements Act contains the double tax agreement between Australia and China (the Chinese Agreement). The Chinese Agreement operates to avoid the double taxation of income received by Australian and Chinese residents.
Article 6 of the Chinese Agreement provides that rental income from real property situated in China may be taxed in China. The Chinese Agreement does not exclude the rental income from being taxable in Australia. Therefore, the rental income may be taxed in Australia and China.
Article 23(2) of the Chinese Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in China will be allowed against Australian tax payable on income from Chinese sources.
As the taxpayer is a resident of Australia for tax purposes, the rental income received from real property situated in China is assessable under subsection 6-5(2) of the ITAA 1997. If tax is paid in China in relation to the rental income, the taxpayer will be entitled to a foreign income tax offset under Division 770 of the ITAA 1997. • 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.
As the taxpayer is a resident of Australia for tax purposes, the rental income received from real property situated in China is assessable under subsection 6-5(2) of the ITAA 1997. If tax is paid in China in relation to the rental income, a foreign tax credit will be allowed.