Assessability of capital gain on sale of a property from the Netherlands

Is the taxpayer, a resident of Australia, assessable on the capital gain on the sale of a property situated in the Netherlands under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer, a resident of Australia, is assessable on the capital gain on the sale of a property situated in the Netherlands under subsection 6-10(4) of the ITAA 1997.

The taxpayer is an Australian resident for taxation purposes.

The taxpayer owned a real property in the Netherlands.

The taxpayer makes a capital gain on the sale of the property.

The taxpayer pays the Netherlands tax on the capital gain.

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 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 those provisions about assessable income. Included in this list is section 102-5 of the ITAA 1997 which provides that a net capital gain is to be included in assessable income. Hence the capital gain on the sale of the property is assessable under subsection 6-10(4) of the ITAA 1997.

However, 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 tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Schedule 10 to the Agreements Act contains the tax treaty and the protocol between Australia and the Kingdom of the Netherlands (the Netherlands Agreement). Schedule 10A to the Agreement Act contains the Second Protocol to the Netherlands Agreement (the Second Protocol). The Netherlands Agreement and the Protocols operate to avoid the double taxation of income received by Australian and Netherlands residents.

Article 13 of the Netherlands Agreement deals with alienation of property. Article 13(1) of the Netherlands Agreement provides that income from the alienation of real property situated in the Netherlands may be taxed in the Netherlands.

The Netherlands Agreement does not exclude the capital gain from being taxed in Australia and it may therefore be taxable in both countries.

Article 23(1) of the Netherlands Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in the Netherlands will be allowed against Australian tax payable on income from Netherlands sources.

The capital gain made on the on sale of the property forms part of the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997.

As foreign tax has been paid in relation to this capital gain, a foreign tax credit will be allowed subject to the Australian foreign tax credit rules. Note: With effect from 1 July 2008 the foreign tax credit system is replaced by the foreign income tax offset system. The position stated in relation to foreign tax credits will apply to income years up to the year ending 30 June 2008. For subsequent income years the position stated will apply to foreign income tax offsets.