ATO Interpretative Decision
ATO ID 2007/23
Income Tax
Assessability of an Australian sourced interest income received by a Sri Lankan residentFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
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)?
Decision
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).
Facts
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.
Reasons for Decision
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.
Date of decision: 4 January 2007Year of income: Year ended 30 June 2005 Year ended 30 June 2006
Legislative References:
Income Tax Assessment Act 1936
section 128B
section 128D
section 6-5
section 6-15
section 6-23
section 11-55 International Tax Agreements Act 1953
section 4
Schedule 31 Article 11 Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974
section 7
Keywords
Double tax agreements
Interest income
International CoE
Non resident individuals
Non resident interest withholding tax
Sri Lanka
ISSN: 1445-2782