Edited version of private ruling

Authorisation Number: 1011828182988

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Ruling

Subject: Foreign income - foreign pension

Questions:

1. Are the proceeds from your overseas premium bond lottery assessable in Australia?

Answer: Yes.

2. Are you required to pay tax on your overseas pensions in Australia?

Answer: Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2003

Relevant facts

You are a resident of Australia for taxation purposes.

You receive money from your premium bonds by way of a lottery.

This lottery is drawn every month.

You have had a number of wins over the years.

You receive a number of pensions.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 26AJ

Income Tax Assessment Act 1936 Subsection 6(1).

Income tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

International Tax Agreements Act 1953 sub section 4

Reasons for decision

Premium bonds

Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. As you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists provisions about assessable income.

Included in the list is section 26AJ of the Income Tax Assessment Act 1936 (ITAA 1936) which deals with investment-related lottery winnings, included cash prizes.

The effect of subsection 26AJ(1) of the ITAA 1936 is that where an amount is paid to a taxpayer and:

· The payment is by way of winnings from betting, lottery or another form of gambling or game with prizes;

· The chance to participate in, for example the lottery, was provided wholly or partly in respect of an investment held by the taxpayer in or with an investment body; and

· The lottery or game was organised by the investment body

then the amount received by the taxpayer is included in their assessable income.

In the case of Premium Bonds from country A, if you win a prize, the winnings received will meet the requirements of subsection 26AJ(1) of the ITAA 1936.

Article 20 of the double taxation agreement between Australia and country A states:

1 Items of income beneficially owned by a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

2 The provisions of paragraph 1 of this Article shall not apply to income, other than income from real property as defined in paragraph 2 of Article 6 of this Convention, derived by a resident of a Contracting State who carries on business in the other Contracting State through a permanent establishment situated therein and the right or property in respect of which the income is paid is effectively connected with such permanent establishment. In that case the provisions of Article 7 of this Convention shall apply.

3 Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State.

4 Where, by reason of a special relationship between the person referred to in paragraph 1 of this Article and some other person, or between both of them and some third person, the amount of the income referred to in that paragraph exceeds the amount (if any) which might reasonably have been expected to have been agreed upon between them in the absence of such a relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such a case, the excess part of the income shall remain taxable according to the laws of each Contracting State, due regard being had to the other applicable provisions of this Convention.

5 A person may not rely on this Article to obtain relief from taxation if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the rights in respect of which the income is derived to take advantage of this Article by means of that creation or assignment.

As you are a resident of Australia the Double Tax Agreement allows the winnings to be taxed in Australia.

The amount is therefore statutory income and must be included in your assessable income in your Australian tax return under section 6-10 of the ITAA 1997.

Even if the winnings remain in country A, you have received the income as it has been dealt with on your behalf or directly by you.

Country A pensions

Double Tax Agreement

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements contained in the International Tax Agreements Act 1953 (the Agreements Act).

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

Article 14 of the Double Tax Agreement between Australia and country A states that:

Any pension or annuity derived from sources within one of the territories by an individual who is a resident of the other territory shall be exempt from tax in the first-mentioned territory.

This means that, the pensions you are receiving from country A are exempt from tax in country A and are only taxable in Australia.

As an Australian resident for taxation purposes you are required to declare all your income both in and outside Australia in your tax returns.

Therefore, the country A pension income you receive must be declared on your Australian tax return each year that you have received it.

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