Issue
Is the income derived from a rental property in Australia by a resident of the United States assessable income under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The income derived from a rental property in Australia by a resident of the United States is assessable under subsection 6-5(3) of the ITAA 1997.
Facts
The taxpayer is a resident of the United States for taxation purposes.
The taxpayer is a non-resident of Australia for income tax purposes.
The taxpayer owns real property in Australia from which they derive rental income.
Reasons for Decision
Under subsection 6-5(3) of the ITAA 1997, the assessable income of a non-resident taxpayer includes: (a) ordinary income derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes as assessable income on some basis other than having an Australian source.
Rental income from real property is ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to Australian tax on income received by a non resident, it is necessary to consider not only the income tax laws but any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997, so that these Acts are read as one.
Schedule 2 to the Agreements Act contains the double tax agreement between Australia and the United States (the United States Convention). Schedule 2A of the Agreements Act contains the protocol amending the United States Convention (the United States Protocol). The United States Agreement and United States Protocol operate to avoid double taxation of income received by Australian and United States residents.
Article 6(1) of the United States Agreement provides that income from real property may be taxed by the country in which the real property is situated.
Paragraph 23 of Taxation Ruling TR 2001/13 states that the phrase 'may be taxed' normally means the source country has a non-exclusive entitlement to tax the income. However, the taxpayer's country of residence may also tax the income subject to the laws of that country, unless the double tax agreement explicitly prevents it.
Article 27(1)(a) of the United States Agreement provides that income derived by a resident of the United States which, under Article 6(1), may be taxed in Australia, shall be deemed to be income from sources in Australia for Australian tax purposes.
Therefore, the income received from a rental property in Australia by a non-resident taxpayer is assessable under subsection 6-5(3) of the ITAA 1997.