Assessability of Australian sourced interest income received by a resident of the Philippines

Is the Australian sourced interest income received by a resident of the Philippines assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The Australian sourced interest income received by a resident of the Philippines is not assessable under subsection 6-5(3) 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 Philippines for income tax purposes.

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

The taxpayer receives interest income from Australian sources.

Subsection 6-5(3) of the ITAA 1997 provides that a non resident's assessable income includes ordinary income derived directly or indirectly from Australian sources, during the income year.

Interest income is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Section 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income then it is not assessable income.

Section 11-55 of the ITAA 1997 provides a list of non-assessable non-exempt income provisions. Included in this list is section 128D of the ITAA 1936.

Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable shall not be included in assessable income.

Interest withholding tax is payable on interest derived by non-residents under subsection 128B(2) of the ITAA 1936.

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 ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Schedule 14 to the Agreements Act contains the tax treaty between Australia and the Republic of the Philippines (the Philippine Agreement). The Philippine Agreement operates to avoid double taxation of income received by Australian and Philippine residents.

Article 11(1) of the Philippine Agreement provides that interest income arising in Australia to which a resident of the Philippines is beneficially entitled, may be taxed in the Philippines.

Article 11(2) of the Philippine Agreement provides that such interest income may be taxed in Australia, but the tax so charged shall not exceed 15 per cent of the gross amount of the interest.

The interest income will be subject to withholding tax at the rate of 10% on the gross amount of interest derived in Australia.

The interest income received by the non resident taxpayer is not assessable under subsection 6-5(3) of the ITAA 1997 as section 128D of the ITAA 1936 applies.

Accordingly, the interest income from Australian sources will not form part of the taxpayer's assessable income under subsection 6-5(3) of the ITAA 1997.