Assessability of interest income derived by a UK resident

Is the interest income received by a taxpayer, a resident of the United Kingdom (UK), assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The interest income received by a taxpayer, a resident of the UK, is not assessable under subsection 6-5(3) of the ITAA 1997 as it is non-assessable non-exempt income under section 128D of Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident of the UK and a foreign resident for Australian income tax purposes.

The taxpayer derives interest income from Australian sources.

Non-resident withholding tax at the rate of 10% was deducted from the interest.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year and other ordinary income that a provision includes as assessable income on some basis other than having an Australian source. Subsection 995-1(1) of the ITAA 1997 defines foreign resident to mean a person who is not a resident of Australia for the purposes of the ITAA 1936.

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

Subsection 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 6-23 of the ITAA 1997 provides that an amount of ordinary income is non-assessable non-exempt income if a provision of the ITAA 1936 or ITAA 1997 or of another Commonwealth law states that it is not assessable income and is not exempt 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 which deals with income subject to withholding tax.

Section 128D of the ITAA 1936 provides that interest upon which withholding tax is payable is not assessable income and is not exempt income.

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

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 sets the rates of withholding tax on payments to which subsection 128B(2) of the ITAA 1936 applies. The rate of withholding tax on interest paid to non-residents is 10%. However, this liability to Australian withholding tax is subject to any applicable tax treaty provisions 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 1 to the Agreements Act contains the tax treaty between Australia and the UK 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.

Article 11(1) of the 2003 UK Convention states that interest arising in Australia and beneficially owned by a resident of the UK may be taxed in the UK. However, under Article 11(2) of the 2003 UK Convention, the interest may also be taxed in Australia, but the tax charged shall not exceed 10% of the gross amount of the interest.

The interest received by the taxpayer will be subject to withholding tax at the rate of 10% on the gross amount of interest. The interest income is not assessable income under subsection 6-5(3) of the ITAA 1997 as section 128D of the ITAA 1936 applies.

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