Assessability of Australian sourced dividend income received by a UK resident

Is the Australian sourced dividend income received by a United Kingdom (UK) resident taxpayer assessable under subsection 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The Australian sourced dividend income received by a UK resident taxpayer is not assessable under subsection 6-10(5) of the ITAA 1997 as it is exempt from tax under section 128D of the Income Tax Assessment Act 1936 (ITAA 1936).

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

The taxpayer receives franked and unfranked dividends from Australian resident companies which are paid out of profits derived from sources in Australia.

Subsection 6-10(5) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes statutory income from all Australian sources and other statutory income included by a provision on a basis other than having an Australian source.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is subsection 44(1) of the ITAA 1936 which provides that the assessable income of a non resident shareholder of a company includes dividends paid by the company to the extent to which they are paid out of profits derived by it from sources in Australia.

Section 6-20 of the ITAA 1997 provides that an amount is exempt income, if it is made exempt from income tax by a provision of the ITAA 1997 or another Commonwealth law.

Section 11-10 of the ITAA 1997 lists those provisions about exempt income. Included in this list is section 128D of the ITAA 1936 which provides that income upon which withholding tax is payable will not be included in the assessable income of a person.

A non resident is liable for withholding tax on unfranked dividends under subsection 128B(1) of the ITAA 1936.

Franked dividends paid to non residents are excluded from withholding tax under paragraphs 128B(3)(ga) and 128B(3)(gaa) of the ITAA 1936. However, section 128D of the ITAA 1936 also provides that income upon which withholding tax would be payable but for the operation of paragraphs 128B(3)(ga) and 128B(3)(gaa) of the ITAA 1936 will not be included in assessable income.

The taxpayer is a resident individual of the UK, a country with which Australia has entered into a double tax agreement. Therefore, the double tax agreement between Australia and the UK and the protocol to that agreement (the UK Agreement) contained in Schedules 1 and 1A to the International Tax Agreements Act 1953 (the Agreements Act) must be considered in determining whether the dividend income derived by the taxpayer is taxable in Australia.

Sections 5 and 5A of the Agreements Act give the UK Agreement the force of law in Australia.

Section 4 of the Agreements Act provides that the ITAA 1936 and the ITAA 1997 must be read as one with the Agreements Act. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited situations).

Article 8(3) of the UK Agreement provides that dividends derived by a UK resident from an Australian resident company may be taxed in the UK. However, the dividends may also be taxed in Australia but the tax charged will not exceed 15% of the gross amount of the dividends.

The withholding tax rate applicable is generally 30% of the dividend amount (section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 ). However, subsection 17A(1) of the Agreements Act provides that the amount of withholding tax imposed shall not exceed the tax limit specified in the Agreements Act, if a limit is so specified. The non resident taxpayer will therefore be liable for withholding tax at the rate of 15% of the gross amount of the unfranked dividends.

The franked and unfranked dividends received by the non resident taxpayer are not assessable under subsection 44(1) of the ITAA 1936 as the dividends are exempt from tax under section 128D of the ITAA 1936.

Accordingly, the dividends will not form part of the taxpayer's assessable income under subsection 6-10(5) of the ITAA 1997.