ATO Interpretative Decision

ATO ID 2004/550

Income Tax

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

Issue

Is an annuity received by a resident taxpayer from an eligible non-resident non-complying superannuation fund (ENRNCSF) located in South Africa assessable under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) and included in the taxpayer's assessable income under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The annuity received by a resident taxpayer from an ENRNCSF located in South Africa is assessable under section 27H of the ITAA 1936 and included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997. However, to the extent that the taxpayer's prior interest in the superannuation policy resulted in an amount being assessed under the Foreign Investment Fund (FIF) measures, part of that annuity would be treated as non-assessable non-exempt income under section 23AK of the ITAA 1936.

Facts

The taxpayer is a resident of Australia for taxation purposes.

Prior to becoming a resident of Australia, the taxpayer was a resident of South Africa for income tax purposes.

The taxpayer invested in a private superannuation policy from a superannuation fund located in South Africa, during the period that the taxpayer was a resident of South Africa.

The taxpayer purchased the policy by way of a lump sum cash consideration.

The provider of the policy is an insurer located in South Africa.

The superannuation fund is an ENRNCSF within the meaning of section 27A of the ITAA 1936.

The taxpayer started to receive an annuity from the policy after the taxpayer became a resident of Australia.

Reasons for Decision

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

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

The investment in the private superannuation policy falls within the FIF provisions. The practical effect of this is that, unless specifically exempted, the accretion in value of the amount held in the policy will be included in the assessable income of the Australian resident on an annual basis.

Where a payment from the private superannuation policy is subsequently received in the form of an annuity, section 27H provides that the annuity will be included in the taxpayer's assessable income.

There will be no double taxation under section 27H for amounts previously included as assessable income under the FIF measures, as the payment will be treated as non-assessable non-exempt income to the extent allowed for under section 23AK.

In determining liability to tax on foreign sourced income received by a 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).

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

Schedule 42 to the Agreements Act contains the double tax agreement and the protocol between Australia and South Africa (the South African Agreement). The South African Agreement operates to avoid the double taxation of income received by Australian and South African residents.

Article 18 of the South African Agreement deals with pensions and annuities.

Article 18(1) provides that a pension or annuity derived by an Australian resident from South African sources shall be exempt from tax in South Africa.

However, Article 18(2) provides that notwithstanding Article 18(1), an annuity paid to an individual who is a former resident of South Africa which has been purchased by that individual by way of a lump sum cash consideration from an insurer, in the course of that insurer's insurance business carried on in South Africa, may be taxed in South Africa.

Article 18(3) defines an annuity as a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time, under and obligation to make the payments in return for adequate and full consideration in money's worth.

The payments received by the taxpayer are an annuity in accordance with Article 18(3). As the taxpayer purchased the annuity from a South African insurer in the course of the insurer's insurance business, the annuity may be taxed in Australia and in South Africa under Article 18(2) of the South African Agreement.

Article 23(1) of the South African Agreement provides that subject to the laws of Australia, the South African tax paid by an Australian resident in respect of income derived from South African sources shall be allowed as a credit against the Australian tax payable on that income.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident taxpayer contains foreign sourced income and foreign tax has been paid on that income, a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of:

(a)

the amount of that foreign tax, reduced in accordance with any relief available to the taxpayer under the law relating to that tax, or

(b)

the amount of Australian tax payable in respect of the foreign income.

Accordingly, the pension received by the taxpayer from an ENRNCSF located in South Africa is assessable under section 27H of the ITAA 1936 (except to the extent that the amount was previously assessed under the FIF measures and is treated as non-assessable non-exempt income under section 23AK) and is included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997.

Where foreign tax has been paid in relation to this assessable income a foreign tax credit will be allowed. If the South African tax paid on the annuity is less than the Australian tax that will be payable then the taxpayer will be entitled to a full credit for the South African tax paid.

Note: where the South African tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a credit equal to the value of the Australian tax payable and cannot recover any excess South African tax paid. However, under section 160AFE of the ITAA 1997, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign income of the same class.

Year of income:  Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1936
   section 23AK
   subsection 27A(1)
   section 27H
   section 160AF(1)
   section 160AFE

Related Public Rulings (including Determinations)
Taxation Ruling TR 2003/12

Keywords
Double tax agreements
Foreign annuity
Foreign superannuation payments
Foreign tax credits
South Africa

Business Line:  Public Groups and International

Date of publication:  9 July 2004

ISSN: 1445-2782