Assessability of interest income sourced in the United States (US) received by a resident individual

Is the US sourced interest income received by a resident individual assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The US sourced interest income received by a resident individual is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer receives interest income from US sources.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Interest 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 (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 2 to the Agreements Act contains the double tax treaty between Australia and the US (US Convention). The US Convention operates to avoid the double taxation of income received by Australian and US residents.

Article 11(1) of the US Convention provides that interest from sources in the US, to which a resident of Australia is beneficially entitled, may be taxed in Australia.

Article 11(2) of the US Convention provides that interest income may also be taxed in the US. However, the tax shall not exceed 10 per cent of the gross amount of the interest.

Article 22(2) of the US Convention provides that a credit against Australian tax for tax paid in the US shall be allowed (in accordance with the law of Australia) where tax has been paid under US law and in accordance with the US Convention.

As the taxpayer is a resident of Australia, the interest income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997. If US tax is paid in relation to this interest income, the taxpayer will be entitled to a foreign income tax offset under Division 770 of the ITAA 1997..