Edited version of private ruling

Authorisation Number: 1011856952747

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Ruling

Subject: Superannuation income stream - family law split

Question

Is the whole amount of the pension paid to you by a foreign fund included in your assessable income and subject to tax?

Advice/Answer

Yes.

This ruling applies for the following period

Year ending 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You are in receipt of a pension from a foreign fund as a result of working in a foreign country.

You and your former spouse separated a number of years ago.

In the 2010-11 income year a financial agreement (the Agreement) was made between you and your former spouse pursuant to section 90C of the Family Law Act 1975.

Under the Agreement you are required to take all necessary steps, and sign all necessary documents, to split your pension with the foreign fund equally between yourself and your former spouse such that each party shall bear responsibility for all taxes and other charges associated with their share.

As the trustees of the foreign fund were not able to split your entitlements in the foreign fund you are making monthly payments to your former spouse in order to fulfil the Agreement.

The trustees of the foreign fund have informed you that they are unable to split the benefit payments unless a court order has been delivered.

Relevant legislative provisions

Income Tax Assessment 1936 Section 27H

Income Tax Assessment 1997 Subsection 6-5(2)

Income Tax Assessment 1997 Section 6-10

Income Tax Assessment 1997 Subsection 6-10(4)

Income Tax Assessment 1997 Section 10-5

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

Summary of decision

The pension from the foreign fund you are in receipt of is an 'annuity' within the meaning of the tax treaty between Australia and the foreign country in which the foreign fund is located.

The pension is being made wholly to you. Therefore, the pension you are receiving is wholly included in your assessable income and forms part of your statutory income.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Section 6-10 of the 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. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4)).

Section 10-5 of the ITAA 1997 lists the 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 paid from a foreign superannuation fund are included in assessable income.

In determining liability of Australian tax for foreign sourced income received by an Australian resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty 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 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).

Section 5 of the Agreements Act lists the current double tax agreements Australia has with other countries. Included in that list is the tax treaty between Australia and the country the foreign fund is located in. The text of this convention (the Convention) is set out in the Australian Treaty Series located in the Australian Treaties database on the Department of Foreign Affairs and Trade website.

The Convention operates to avoid the double taxation of income received by Australian residents and residents of the foreign country.

The Convention provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.

The Convention provides that the term 'annuity' means a stated sum payable periodically to an individual at stated times during life 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.

You are an Australian resident for taxation purposes.

The pension you are in receipt of from the foreign fund is an annuity within the meaning of the Convention and is taxable only in Australia.

It is noted that you entered a financial agreement (the Agreement) in the 2010-11 income year with your former spouse. Under the Agreement you are required to take all necessary steps, and sign all necessary documents, to split your pension with the foreign fund equally between yourself and your former spouse such that each party shall bear responsibility for all taxes and other charges associated with their share.

However, the financial agreement, though enforceable by law in Australia, is not enforceable by law in the country in which the foreign fund is located. Consequently, the trustees of the foreign fund are not compelled to split your pension in the foreign fund and the pension is being made wholly to you. It is only after the pension is made to you that you are subsequently making monthly payments to your former spouse in order to fulfil the Agreement.

Therefore, the pension you are receiving is wholly included in your assessable income under section 27H of the ITAA 1936 and forms part of your ordinary income under section 6-5 of the ITAA 1997.