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Ruling

Subject: Invalids benefit

Question 1

Is your country A invalids benefit exempt income in Australia for the period ended 30 June 2010?

Answer

No.

Question 2

Is your country A invalids benefit exempt income in Australia for the period ended 30 June 2011?
Answer

No.

This ruling applies for the following periods

Year ended 30 June 2010
Year ended 30 June 2011

The scheme commenced on

1 July 2008

Relevant facts and circumstances

You are a resident of Australia.
You receive a country A invalids benefit as your spouse receives a country A invalids benefit. This benefit was granted from early 2009.

Your country A invalids benefit paid overseas is not taxed in country A. Country A invalids benefits paid in country A are taxable.

Your spouse receives a country A invalids benefit and an Australian disability support pension. The combined amount of Australian and country A payment received by you and your spouse are comparable to the amount and your spouse would have received if you and your spouse had no country A payment.

You and your spouse's combined annual income includes the country A invalid benefit. The country A payment you or your spouse receive is topped up to the level of Australian payment you and your spouse would otherwise have received.

Relevant legislative provisions

International Tax Agreements Act 1953 subsection Sch 4-Article 18.
Income Tax Assessment Act 1997 section 6-5

Reasons for decision

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.

The invalids benefit you receive from the country A Government has been calculated in connection to your wife's invalids benefit. This benefit is a separate country A benefit and although similar to the Australian Disability Support Pension paid by Centrelink under the Social Security Act 1991 it remains a country A benefit. This benefit is topped up to the level of the Australian payment you would have otherwise received.

Section 52-10 of the ITAA 1997 lists those payments made under the Social Security Act 1991 which are exempt. The Disability Support Pension paid to a person under pension age is specifically exempt under the list. The invalids benefit you receive from the country A Government is not in the list. No other legislation operates to exempt that benefit.

However in determining liability to Australian tax on foreign sourced income 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).

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

Article 19 of the country A Agreement of 1995 deals with pensions and annuities and provides that a pension or annuity paid to a resident of Australia shall be taxable only in Australia.

The country A invalids benefit is considered to be a pension. Consequently, the country A Agreement of 1995 gives Australia the taxing right on the invalids benefit paid from country A. There is no provision in the Australian tax legislation that exempts it. Therefore the country A invalids benefit is included in your assessable income under subsection 6-5(2) of the ITAA 1997 for the period ended 30 June 2010.

On 19 March 2010 the country A Agreement of 1995 was substituted by the 2009 country A Convention (the Convention) and took force on the same date. Article 30 of the Convention states it will have effect on or after 1 July next following the date the Convention takes force, therefore the effective date for the commencement of the Convention in regard to income is 1 July 2010.

Article 19 of the Convention now provides that pensions paid to a resident of Australia shall be taxable only in Australia. However, such income arising in country A shall not be taxed in Australia to the extent that such income would not be subject to tax in country A if the recipient were a resident of country A.

Applying Article 19 of the Convention to your situation provides that if you were a resident of country A your invalids benefit would be taxable in country A therefore, under Article 19 of the Convention your invalids benefit that was previously taxable in Australia will continue to be taxable in Australia from 1 July 2010.