ATO Interpretative Decision
ATO ID 2009/75
Income Tax
Foreign Income Tax Offset: New Zealand government superannuation pensionFOI status: may be released
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This ATO ID has been amended by replacing the reference to paragraphs (2) of Article 24 and (1) of Article 19 to the tax treaty between Australian and New Zealand with paragraphs (1) of Article 23 and (1) of Article 18 contained in the new tax treaty which took effect from 19 March 2010.
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade.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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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 the taxpayer entitled to a foreign income tax offset under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a pension received from the New Zealand (NZ) Government Superannuation Fund?
Decision
No. The taxpayer is not entitled to a foreign income tax offset under Division 770 of the ITAA 1997 in relation to the pension received from the NZ Government Superannuation Fund because they have not paid foreign income tax on the income.
Facts
The taxpayer is an Australian resident for taxation purposes.
The taxpayer is retired and receives a NZ Government Superannuation Pension.
The NZ Government Superannuation Fund Amendment Act 1990 amended the NZ Government Superannuation Fund Act 1956 reducing existing allowances and annuities. The allowance received is now called a Free of Tax Annual Allowance.
The Free of Tax Annual Allowance is reduced by the amount referred to as the Free of Tax Reduction. The Free of Tax Reduction is an amount calculated in accordance with the formula in section 4 of the NZ Government Superannuation Fund Amendment Act 1990.
The Free of Tax Annual Allowance is non-assessable in NZ.
The Free of Tax Annual Allowance is assessable in Australia under section 6-5 of the ITAA 1997.
Reasons for Decision
Subsection 770-10(1) of the ITAA 1997 states that you are entitled to a tax offset for an income year for foreign income tax, if you paid it in respect of an amount that is included in your assessable income for the year.
Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' as follows:
Foreign income tax means tax that:
Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.
The taxpayer's Free of Tax Reduction is calculated by reference to the amount of NZ tax that would otherwise have been payable on the Free of Tax Annual Allowance, and the formula as set out in section 4 of the NZ Government Superannuation Fund Amendment Act 1990. The Free of Tax Reduction is the amount by which the Free of Tax Annual Allowance is reduced.
In HWE Jones v. FC of T 98 ATC 2263; (1998) 40 ATR 1048 (Jones), the Administrative Appeals Tribunal (AAT) considered the status of a reduction calculated pursuant to section 4 of the NZ Government Superannuation Fund Amendment Act 1990, and concluded that it was not a tax. In the judgment, the AAT stated at paragraph 16:
So in the instant case, instead of the government paying the pensions and then taxing them, the transfer payment is avoided by reducing the pensions accordingly and not taxing the reduced pension.
Accordingly, the Free of Tax reduction is not a tax, nor is it a tax imposed by NZ law. Consequently, it is not a 'foreign income tax' for the purposes of subsection 770-15(1) of the ITAA 1997.
As a result, the taxpayer is not entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997 on the pension paid from the NZ Government Superannuation Fund.
Further, the note to subsection 770-15(1) of the ITAA 1997 states that where a foreign jurisdiction has a tax treaty with Australia having the force of law under the International Tax Agreements Act 1953 (Agreements Act), foreign income tax includes only tax which has been correctly imposed in accordance with that tax treaty.
In determining liability to Australian 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 Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one with the Agreements Act. Schedule 4 to the Agreements Act contains the tax treaty between Australia and NZ (the NZ Convention).
Article 23(1) of the NZ Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in NZ under NZ law and in accordance with the NZ Convention will be allowed against Australian tax payable on income from NZ sources. As the Free of Tax Annual Allowance received is non-assessable in NZ, there has been no NZ tax paid under the law of NZ.
Article 18(1) of the NZ Convention provides that pensions paid to a resident of Australia shall be taxable only in Australia. Hence, the pension received from the NZ Government Superannuation Fund cannot be taxed in NZ under the NZ Convention. Consequently, even if it were recognised that the taxpayer had paid tax in NZ in respect of the pension received, such tax would not have been paid in accordance with the NZ Convention.
The AAT reached this conclusion in Jones at paragraph 20 which stated:
... if, to the contrary, it was found that the applicant was personally liable for income tax paid in New Zealand on the pension then that would appear to be contrary to the provisions of Article 19.1 of the Australia-New Zealand double tax treaty, the remedy, if any, being found in Article 25, the competent authority provision of that treaty.
The taxpayer has not paid any NZ tax on the Free of Tax Annual Allowance. Further, had the taxpayer paid NZ tax on the allowance, that tax would not be foreign income tax as defined in subsection 770-15(1) of the ITAA 1997.
As the taxpayer has not paid foreign income tax on the Free of Tax Annual Allowance, the taxpayer is not entitled to a foreign income tax offset under Division 770 of the ITAA 1997 in respect of that income.
Date of decision: 17 July 2009Year of income: Year ended 30 June 2009 Year ended 30 June 2010 Year ended 30 June 2011 Year ended 30 June 2012 Year ended 30 June 2013
Legislative References:
Income Tax Assessment Act 1997
section 6-5
Division 770
subsection 770-10(1)
subsection 770-15(1)
section 4
Schedule 4
Schedule 4, Article 18(1)
Schedule 4, Article 23(1) Government Superannuation Fund Act 1956
The Act Government Superannuation Fund Amendment Act 1990
section 4
Case References:
HWE Jones v FC of T
98 ATC 2263
(1998) 40 ATR 1048
ATO ID 2003/908
Keywords
Double tax agreements
Foreign pension
International tax
New Zealand
Treaties
ISSN: 1445-2782