Edited version of private ruling

Authorisation Number: 1011906863999

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Ruling

Subject: Overseas pension

Question 1

Are your overseas pensions assessable in Australia?

Answer

Yes.

Question 2

Are you entitled to a foreign income tax offset for the tax paid on this income overseas?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for tax purposes.

You receive pension income from overseas.

You pay foreign tax on this income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10.
International Tax Agreements Act 1953

Reasons for decision

Assessable income

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

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary income that have evolved from case law include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

Pensions are generally regarded as ordinary assessable income.

Some foreign payments, for example, certain war time compensation payments are specifically exempted under the ITAA 1997. Your benefits are not among those listed as exempt. As the payments are not excluded by the operation of Australian tax laws it is then necessary to look at the terms of any international agreement between Australia and the overseas country.

The International Tax Agreements Act 1953 (the Agreements Act) contains the tax treaty between Australia and country A which operates to avoid the double taxation of income received by Australian and country A residents.

Subsection 4(1) of the Agreements Act provides that the Agreements Act incorporates the ITAA 1997 and those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited situations that are not relevant in the present case).

The relevant article provides that pensions and annuities arising in country A and paid to a resident of Australia may be taxed in Australia.

The benefits made to you from country A are regarded as pensions. As such they may be taxed in Australia.

As stated above, your pension payments are ordinary income and are included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Therefore the pensions form part of your assessable income and should be declared on your Australian tax return.

Foreign income tax offset

From 1 July 20XX the foreign tax credit system was replaced by the foreign income tax offset system.

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As your overseas pensions are assessable to you in Australia, the overseas tax you paid on this income is used in calculating your allowable foreign income tax offset in Australia.  

The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997).

When claiming a foreign income tax offset of more than $1,000 you need to calculate your foreign income tax offset limit. For information on this, please refer to the Guide to foreign income tax offset rules 2010-11 on the Australian Taxation Office website www.ato.gov.au. You can only claim an offset up to the amount of that cap. Any excess offset cannot be carried forward to a later income year.

Differences between the Australian and country A tax systems and years lead to you paying foreign income tax in a different income year to that in which you include the related income in your Australian assessable income.

Only that proportion of the foreign income tax paid which relates to the proportion of foreign income included as assessable income is available as a tax offset.

Therefore to determine the amount of the tax offset in a year, you must first calculate the total foreign income tax paid on amounts included in your Australian assessable income for that year. Foreign income tax is not considered to have been paid to the extent that it is refundable.

Where you pay foreign income tax after the year in which the related income has been included in your assessable income, you may amend your assessment for that year to claim the offset.

Foreign income and foreign tax paid in a foreign currency needs to be translated into Australian currency before including the amounts in your tax return.