Assessability of rental income received by Sri Lankan resident from real property situated in Australia

Is the rental income received by a non-resident taxpayer from real property located in Australia assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The rental income received by a non-resident taxpayer from real property located in Australia is assessable under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a non-resident of Australia for income tax purposes.

The taxpayer is a resident of Sri Lanka for income tax purposes.

The taxpayer owns real property situated in Australia.

The taxpayer receives rental income from that property.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.

Rental income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax, 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.

Schedule 31 to the Agreements Act contains the double tax convention between Australia and the Democratic Socialist Republic of Sri Lanka (the Sri Lankan Agreement). The Sri Lankan Agreement operates to avoid double taxation of income received by Australian and Sri Lankan residents.

Article 6(1) of the Sri Lankan Agreement provides that income from real property may be taxed by the country in which the real property is situated.

Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' normally means the source country has a non-exclusive entitlement to tax the income. However, the country of residence of the taxpayer may also tax the income subject to the laws of that country, unless the double tax agreement explicitly prevents it.

Article 22(1) of the Sri Lankan Agreement provides that income derived by a resident of Sri Lanka which, under Article 6, may be taxed in Australia shall be deemed to be income from sources in Australia for Australian tax purposes.

Accordingly, the rental income received by a non-resident taxpayer from real property situated in Australia is assessable under subsection 6-5(3) of the ITAA 1997.