Assessability of rental income received from Switzerland: foreign tax credits

Is rental income derived by an Australian resident taxpayer in respect of real property situated in Switzerland assessable income pursuant to subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The rental income derived by a resident taxpayer from sources in Switzerland is assessable under subsection 6-5(2) of the ITAA 1997. A foreign tax credit will be allowable in respect of the Swiss income tax paid on the rental income derived.

The taxpayer is an Australian resident for tax purposes.

The taxpayer derived rental income in respect of real property situated in Switzerland.

The taxpayer has or will pay income tax imposed in Switzerland on the rental income derived.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Rental income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Therefore as the taxpayer is an Australian resident, rental income derived from sources within Australia or Switzerland will be assessable income pursuant to subsection 6-5(2) of the ITAA 1997.

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 Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 15 to the Agreements Act contains the tax treaty between Australia and Switzerland (Swiss Agreement). The Swiss Agreement operates to avoid the double taxation of income received by Australian and Swiss residents. The application of a double tax agreement is at first instance the role of the source country. In this case, Switzerland is entitled to assert source country taxing rights. Australia is treated as the country of residence.

Article 6(1) of the Swiss Agreement provides that rental income derived by an Australian resident from real property situated in Switzerland may be taxed in Switzerland.

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 specifically prevents it.

The Swiss Agreement does not exclude the rental income from being taxable in Australia. Therefore, the rental income may be taxed in both Australia and Switzerland.

Article 22(1) of the Swiss Agreement provides that tax paid under the law of Switzerland and in accordance with the Agreement, in respect of income derived by a person who is a resident of Australia from sources in Switzerland, shall be allowed as a credit against Australian tax payable in respect of that income.

Accordingly, as the rental income derived by the Australian resident taxpayer from real property located in Switzerland is assessable under subsection 6-5(2) of the ITAA 1997, the taxpayer will be entitled to a foreign tax credit for the Swiss income tax paid. If the Swiss tax is less than the Australian tax payable then the taxpayer will be entitled to a full credit for the Swiss tax paid. Where the Swiss tax is greater that the Australian tax payable, the taxpayer is entitled only to a credit equal to the value of the Australian tax payable and cannot recover any excess Swiss tax paid.