Assessability of dividends received by Australian resident from the United Kingdom

Are dividends received by an Australian resident individual from the United Kingdom (UK) assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. Dividends received by an Australian resident individual from the UK are assessable under subsection 6-10(4) of the ITAA 1997.

The taxpayer will be a resident of Australia for the 2004-05 income year.

The taxpayer will receive dividends from UK sources.

The dividends will be taxed at the rate of 10% in the UK.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident taxpayer includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists the provisions about what constitutes assessable income. Included in this list is subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with dividends.

Paragraph 44(1)(a) of the ITAA 1936 provides that, subject to certain provisions, the assessable income of an Australian resident taxpayer, who is a shareholder of a company (whether the company is a resident or non-resident), includes dividends paid to the taxpayer by the company out of profits derived by it from any source.

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 1 to the Agreements Act contains the tax treaty between Australia and the United Kingdom of Great Britain and Northern Ireland and the Notes to the agreement (2003 UK Convention). The 2003 UK Convention operates to avoid double taxation of income received by Australian and UK residents. In the case of Australia, the 2003 UK Convention has effect in relation to income or gains of any year of income beginning on or after 1 July 2004.

Article 10(1) of the 2003 UK Convention provides that dividends paid by a UK company, being dividends beneficially owned by a resident of Australia, may be taxed in Australia.

Article 10(2) of the 2003 UK Convention provides that the dividends may also be taxed in the UK, however the tax charged shall not exceed: (a) 5% of the gross amount of the dividends, if the beneficial owner is a company which holds directly at least 10% of the voting power in the company paying the dividends, and (b) 15% of the gross amount of the dividends in all other cases.

As the taxpayer is an Australian resident individual in receipt of dividends from a UK company, the dividends may be taxed in Australia and in the UK. However, the tax payable in the UK is limited to a maximum of 15% of the gross amount of the dividends.

Article 22(1)(a) of the 2003 UK Convention provides that a credit against Australian tax payable shall be allowed for UK tax paid (in accordance with the law of Australia) where tax has been paid under UK law and in accordance with the 2003 UK Convention.

As the taxpayer is an Australian resident, the dividend income received from the UK forms part of their assessable income under subsection 6-10(4) of the ITAA 1997.

Where UK tax is paid in relation to the dividend income, a foreign tax credit will be allowed. However, the amount of UK tax that may be considered for a credit under the foreign tax credit provisions is limited to 15% of the gross amount of the dividend.