Assessability of interest income received from the United Kingdom (UK) by an Australian resident

Is the interest income received by an Australian resident taxpayer from sources in the UK included in assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Interest income received by an Australian resident from sources in the UK is included in assessable income under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer derives interest income from sources in the UK.

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 during the income year.

Interest income is ordinary income for the purpose 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 1 to the Agreements Act contains the tax treaty between Australia and the United Kingdom of Great Britain and Northern Ireland (2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

The 2003 UK Convention entered into force on 17 December 2003, and in the case of Australia, in respect of Australian tax applies to income or gains for the income year beginning on 1 July 2004 and thereafter.

Article 11(1) of the 2003 UK Convention provides that interest arising in the UK and beneficially owned by a resident of Australia may be taxed in Australia.

Article 11(2) of the UK Convention provides that the interest may also be taxed in the UK but the rate of tax is limited to 10 percent of the gross amount of the interest.

Article 22(1)(a) of the UK Convention provides that, a credit against Australian tax payable shall be allowed for UK tax paid shall be allowed (in accordance with the law of Australia) where tax has been paid under UK law and in accordance with the UK Convention.

As the taxpayer is a resident of Australia, the UK interest income forms part of their assessable income under subsection 6-5(2) of the ITAA 1997

Where UK tax is paid in relation to this interest, a foreign tax credit will be allowed. However, the amount of UK tax that may be considered for a credit under foreign tax credit provisions is limited to 10% of the gross amount of the interest.