ATO Interpretative Decision

ATO ID 2002/186

Income Tax

• This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Is the taxpayer, a resident of the United States of America (USA), assessable on their Australian sourced pension under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The taxpayer, a resident of the USA, is not assessable on their Australian sourced pension under section 6-5 of the ITAA 1997.

Facts

The taxpayer is a resident of the USA and is a non resident for Australian tax purposes.

The taxpayer had been a partner in an Australian partnership. The taxpayer has retired and under the provisions of the partnership agreement they are paid a monthly pension from the partnership.

The pension is paid in consideration of services rendered by the taxpayer before their retirement.

The taxpayer pays income tax in the USA on this pension.

Reasons for Decision

Subsection 6-5(3) of the ITAA 1997 provides that ordinary income derived by a non resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable. Statutory income from all Australian sources, or included by a provision on a basis other than having an Australian source, is also included in a non resident's assessable income under subsection 6-10(5) of the ITAA 1997.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income.

In determining liability to Australian tax on Australian sourced income received by a non resident 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 (the Agreements Act).

Schedule 2 of the Agreements Act contains the double tax agreement between the Australia and the USA (the USA Convention). The USA Convention operates to avoid the double taxation of income received by Australian and USA residents.

Article 18 of the USA Convention deals with pensions and annuities. Paragraph (1) of Article 18 provides that subject to the provisions of Article 19 (Government Remuneration), pensions and other similar remuneration paid in consideration of past employment to an individual who is a resident of the USA shall be taxable only in the USA.

Paragraph (4) of Article 18 of the USA Convention defines the term 'pensions and other similar remuneration' to include periodic payments made by reason of retirement or death, in consideration for services rendered.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

The pension paid by the Australian partnership is a periodic payment in consideration for services previously rendered and is therefore a 'pension or other similar remuneration' for the purposes of the USA Convention. As the taxpayer is a resident of the USA, the pension they receive is subject to tax only in the USA and therefore does not form part of their assessable income under section 6-5 of the ITAA 1997.

Year of income:  Year ended 30 June 1997 Year ended 30 June 1998 Year ended 30 June 1999 Year ended 30 June 2001 Year ended 30 June 2000

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(3)
   subsection 6-10(5)
   section 10-5

Keywords
Double tax agreements
Foreign pension income
Non resident individuals
Superannuation pension income

Business Line:  Small Business/Individual Taxpayers

Date of publication:  28 February 2002

ISSN: 1445-2782