Assessability of interest income sourced in France received by an Australian resident individual

Is the French sourced interest income received by an Australian resident individual assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The French sourced interest income received by an Australian resident individual is assessable under subsection 6-5(2) of the ITAA 1997. However, if the Australian resident has paid French income tax on the interest income, they are entitled to claim a foreign income tax offset.

The taxpayer is a resident of Australia for taxation purposes.

The taxpayer receives interest income from French sources.

The interest was paid at an arm's length rate, and was not connected with a permanent establishment of the taxpayer in France.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Interest income is ordinary income for the purposes of 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 tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one.

Schedule 11 to the Agreements Act contains the tax treaty between Australia and France (the 2006 French Convention) which came into force on 1 June 2009. The 2006 French Convention operates to prevent fiscal evasion and to avoid double taxation of income received by Australian and French residents.

Article 11(1) of the 2006 French Convention provides that interest income arising in France, being interest which is beneficially owned by a resident of Australia, may be taxed in Australia. However, Article 11(2) of the 2006 French Convention allows France to also tax the interest income, but at a rate not exceeding 10 per cent of the gross amount of the interest

Where France exercises its right under Article 11(2) of the 2006 French Convention to tax the interest, Article 23(1) of the 2006 French Convention operates to require the French tax paid to be allowed as a credit against Australian tax payable in respect of that income.

Hence, although the Convention limits the rate of tax France can impose, it allows for this interest income to be taxed by both countries. As the Convention does not prevent Australia taxing the interest income received by the Australian resident individual, the interest income is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Further, the Convention obliges Australia to provide relief from double taxation. This reflects the position applicable under Australia's domestic general foreign income tax offset rules in Division 770 of the ITAA 1997.

Subsection 770-10(1) of the ITAA 1997 provides for a foreign income tax offset for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income.

Section 770-15 of the ITAA 1997 defines 'foreign income tax' to include a tax on income that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty.

Consequently, an amount of tax that is imposed by France on the interest income and that is not more than 10% of the gross amount of the interest, will satisfy the definition of 'foreign income tax'. If the Australian resident individual has paid that foreign income tax, they will be entitled to a foreign income tax offset in relation to that tax. The amount of foreign income tax offset is calculated in accordance with Subdivision 770-B of the ITAA 1997. Note: for interest income derived between 1 July 2008 and 30 June 2010 the decision above will apply, but the relevant provisions of the former French treaty will apply.