Assessability of an Australian sourced interest income received by a Sri Lankan resident

Is interest paid by an Australian bank to a Sri Lankan resident assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. Interest paid by an Australian bank to a Sri Lankan resident is not assessable under subsection 6-5(3) of the ITAA 1997 as it is non-assessable non-exempt income under section 128D of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a Sri Lankan resident and is not an Australian resident.

The taxpayer received interest from an Australian bank who is a resident of Australia. Non resident withholding tax was withheld from the taxpayer's bank 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. Interest derived by the taxpayer is ordinary income for the purposes of 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. An amount is non-assessable non-exempt income if a provision of the ITAA 1997 or another Commonwealth law states that it is not assessable income and not exempt income (section 6-23 of the ITAA 1997).

Section 11-55 of the ITAA 1997 lists provisions about non-assessable non-exempt income. Included in this list is section 128D of the ITAA 1936.

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

A non-resident receiving interest paid by an Australian resident is liable for withholding tax on interest under subsections 128B(2) and 128B(5) of the ITAA 1936. Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 provides that the rate of withholding tax on interest paid to non-residents is 10%.

In determining liability to tax on income received by a foreign resident, it is also necessary to consider 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 1936 and ITAA 1997 so that those Acts are read as one. Schedule 31 to the Agreements Act contains the double tax agreement between Australia and Democratic Socialist Republic of Sri Lanka (the Sri Lankan Agreement).

Article 11 of the Sri Lankan Agreement deals with interest income. Article 11(1) of the Sri Lankan Agreement provides that interest arising in Australia to which a Sri Lankan resident is beneficially entitled, may be taxed in Sri Lanka. Article 11(2) of the Sri Lankan Agreement provides that interest arising in Australia may also be taxed in Australia but the tax shall not exceed 10% of the gross amount. Article 11(5) of the Sri Lankan Agreement provides that interest arises in the place where the payer resides.

In the present case, the interest income is paid by an Australian resident bank and so arises in Australia. As explained above, Article 11(2) of the Sri Lankan Agreement allows Australia to tax that income. The interest is subject to 10% withholding tax and is non-assessable non-exempt income under section 128D of the ITAA 1936.

Accordingly, the interest received by the taxpayer from an Australian resident bank is subject to withholding tax will not form part of their assessable income under subsection 6-5(3) of the ITAA 1997.