Assessability of dividends received from South Africa by Australian resident

Is the dividend income received from South Africa by an Australian resident assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The dividend income received from South Africa by an Australian resident is assessable under subsection 6-10(4) of the ITAA 1997.

The taxpayer is a resident of Australia for tax purposes.

The taxpayer owns shares in South African companies listed on the Johannesburg Stock Exchange.

The taxpayer receives South African sourced dividend income from those shares.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends. Subsection 44(1) of the ITAA 1936 provides that the assessable income of a resident shareholder of a company (whether the company is a resident or a non resident) shall include dividends paid by the company out of profits derived by it from any source.

In determining liability to Australian tax on foreign source 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 ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 42 to the Agreements Act contains the double tax agreement between Australia and South Africa (the South African Agreement). The South African Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 10 of the South African Agreement deals with dividends. Article 10(1) provides that dividends paid by a South African company to which a resident of Australia is beneficially entitled may be taxed in Australia.

Article 10(2) of the South African Agreement provides that those dividends may also be taxed in South Africa, however: (a) no tax shall be charged on dividends where those dividends are paid out of profits that have borne the normal rate of South African company tax and where those dividends are paid to a company which holds directly at least 10% of the capital of the company paying the dividends, and (b) tax charged shall not exceed 15% of the gross amount of the dividends in all other cases.

As the taxpayer is an Australian resident individual in receipt of dividends from a South African company, the dividends may be taxed in Australia and in South Africa. However, the tax payable in South Africa is limited to a maximum of 15% of the gross amount of the dividends.

Article 23(1) of the South African Agreement provides that subject to the laws of Australia, the South African tax paid by an Australian resident in respect of income derived from South African sources shall be allowed as a credit against the Australian tax payable on that income.

As the taxpayer is a resident of Australia, the dividend income received from South Africa is assessable under subsection 6-10(4) of the ITAA 1997. Where foreign tax has been paid in relation to this income a foreign tax credit will be allowed. If the South African tax paid on the dividends is less than the Australian tax that will be payable then the taxpayer will be entitled to a full credit for the South African tax paid.