ATO Interpretative Decision

ATO ID 2003/853 (Withdrawn)

Income Tax

• This ATO ID has been withdrawn from the database because it contains references to the tax treaty between Australia and New Zealand that was replaced with a new tax treaty which entered into force on 19 March 2010. Despite its withdrawal from the database, this ATO ID continues to be a precedential view in respect of decisions up to, and including, 30 June 2010.
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Are the 'annuity' payments received from an Australian resident testamentary trust by a New Zealand resident assessable under subsection 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The 'annuity' payments received from an Australian resident testamentary trust by a New Zealand resident are assessable under subsection 6-10(5) of the ITAA 1997 as they not annuities for the purposes of Article 19(1) of Schedule 4 to the International Tax Agreements Act 1953 (the Agreements Act).

Facts

The taxpayer is a resident of New Zealand for income tax purposes.

The taxpayer is a beneficiary of an Australian resident testamentary trust estate created under a will.

Under the terms of the will, the taxpayer is entitled for fixed 'annuity' payments from the trust.

The trustee of the testamentary trust estate invests the trust's funds in Australia for the purpose of providing fixed 'annuity' payments to the taxpayer.

The testamentary trust estate receives income from the funds invested in Australia.

The trustee of the testamentary trust distributes the income received from the funds invested in Australia to the taxpayer as fixed 'annuity' payments.

Reasons for Decision

Subsection 6-10(5) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes statutory income from all Australian sources and other statutory income that a provision includes on some basis other than having an Australian source.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section of 98A of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with liability to tax on distributions made to non resident beneficiaries.

Section 98A of the ITAA 1936 provides that where the trustee of a trust estate is assessed and liable to pay tax in respect of the whole or a part of a share of the net income of a trust estate of a year of income in pursuance of subsection 98(4) of the ITAA 1936, the assessable income of the beneficiary who is presently entitled to that share of the income of trust estate will include so much of the individual interest of the beneficiary in the net income of the trust estate when the beneficiary was not a resident and is also attributable to sources in Australia.

Subsection 98(4) of the ITAA 1936 provides that where a beneficiary of a trust estate who is presently entitled to a share of the net income of the trust estate, the trustee of the trust estate will be assessed and is liable to pay tax in respect of net income attributable to the period the beneficiary was not a resident and is also attributable to sources in Australia.

In determining liability to Australian tax on Australian sourced income received by a non resident, it is relevant to consider not only the income tax laws but also any applicable double tax agreements contained in the 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the double tax agreement between Australia and New Zealand (the New Zealand Agreement). The New Zealand agreement operates to avoid the double taxation of income received by Australian and New Zealand residents.

Article 19(1) of the New Zealand Agreement provides that pensions and annuities paid to a resident of New Zealand will be taxable only in New Zealand.

Article 19(2) of the New Zealand Agreement defines the term annuity as a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

The term annuity as defined in Article 19(2) of the New Zealand Agreement applies only to annuities that have been purchased for adequate consideration. The payments made to the taxpayer are not an annuity for the purposes of Article 19(1) of the New Zealand Agreement as there was no annuity purchased for adequate consideration. Instead, the payments made to the taxpayer are distributions of net income from the capital invested by the testamentary trust.

Paragraph 117 of Taxation Ruling TR 2001/13 states that Explanatory Memoranda should, as a matter of practice, be examined in the consideration of novel issues involving recent double tax agreements. The Explanatory Memorandum accompanying the Income Tax (International Agreements) Act (No.2) 1960 introducing the previous New Zealand Agreement (the Old NZ Agreement) suggests that the relevant articles used in the Old NZ Agreement have never been intended to extend to payments made by trustees under a will. The Explanatory Memorandum states that:

Annuities paid under a will or trust instrument are not covered by the article and the present practice of taxing them in the country of their origin will be preserved.

While this explanation is not included in the Explanatory Memorandum introducing the New Zealand Agreement, there are no indications to suggest a change in policy since the definition of annuity is similar to the Old New Zealand Agreement and the scope of the relevant articles has been maintained in the New Zealand Agreement.

As the payments made under a will do not come within the definition of annuities under Article 19(2) of the New Zealand Agreement, Article 19(1) of the New Zealand Agreement will not apply.

Accordingly, the assessable income of the non resident taxpayer will include the distributions from the testamentary trust under subsection 6-10(5) of the ITAA 1997.

Legislative References:
Income Tax Assessment Act 1936
   subsection 98(4)
   section 98A

Related Public Rulings (including Determinations)
Taxation Ruling TR 2001/13

Keywords
Annuity income
Double tax agreements
New Zealand

Business Line:  Public Groups and International

Date of publication:  26 September 2003

ISSN: 1445-2782