Assessability of distributions received by an Australian resident from a United Kingdom unit trust

Are distributions received by an Australian resident taxpayer from a United Kingdom (UK) unit trust, assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The distributions received by an Australian resident taxpayer from a UK unit trust are assessable income under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer holds an interest in a UK unit trust.

The taxpayer elected to have distributions issued by the trust automatically reinvested back into the trust.

The value of the taxpayer's interest in the unit trust is less than $50,000.

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

A distribution from a unit trust is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-5(4) of the ITAA 1997 provides that a taxpayer derives an amount of ordinary income when the amount is received, or when it is dealt with in any way on the taxpayer's behalf or as the taxpayer directs.

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 Agreements Act 1953 (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 1 to the Agreements Act contains the double tax convention between Australia and the UK of Great Britain and Northern Ireland (the UK Convention). Schedule 1A to the Agreements Act contains the UK Protocol. The UK Convention and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 20 of the UK Convention deals with the taxation of income not addressed by the other Articles of the Convention. Article 20 of the UK Convention gives Australia a taxing right on the distribution from a unit trust which is derived from a UK source.

Therefore, the distributions received by the taxpayer from the unit trust are assessable income in Australia under subsection 6-5(2) of the ITAA 1997.