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Edited version of your private ruling
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Ruling
Subject: Foreign income - pension
Question 1
Is the pension that you receive from the country X assessable in Australia?
Answer
Yes.
Question 2
If you have made personal contributions to your country X pension, are you entitled to a deductible amount of the Undeducted Purchase Price (UPP) of this pension?
Answer
Yes.
This ruling applies for the following period:
Year ended 30 June 2011
The scheme commences on:
01 July 2010
Relevant facts
You are an Australian resident for tax purposes.
You receive a superannuation pension from country X.
Your pension is taxed in country X.
Australia has a tax treaty with country X.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 301-10
Income Tax Assessment Act 1997 Section 307-10(d)
Income Tax Assessment Act 1936 Section 27H
Income Tax Assessment Act 1936 Subsection 27H(2)
International Tax Agreements Act 1953 Section 4
Reasons for decision
Summary
Residents of Australia for tax purposes are taxed on their worldwide income. The tax treaty between Australia and country X states that a pension paid to a resident of Australia is taxable only in Australia.
Therefore, your country X pension is assessable for tax in Australia. As you have paid tax in country X, you should contact the country X tax authorities and request a refund of that tax. You should also inform the payer of your country X pension that you are an Australian resident and to discontinue deducting tax.
If you have made personal contributions to your country X pension, you may be eligible to claim a deductible amount for the Undeducted Purchase Price (UPP) of your pension. This will subsequently reduce the taxable amount of your pension.
Detailed Reasoning
Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
Superannuation pensions are included in assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).
In determining the liability of an Australian resident to Australian tax on foreign sourced income, it is necessary to consider not only the Australian tax laws but also any applicable tax treaty.
Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act).
The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes).
Australia has signed a tax treaty with country X (the Convention).
An article of the Convention provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.
Accordingly, as you are a resident of Australia for tax purposes, the pension that you receive from country X is required to be included in your assessable income.
As you have paid tax in country X on the pension, you should contact the country X tax authorities and request a refund of that tax. You should also inform the payer of your country X pension that you are an Australian resident and to discontinue deducting tax.
Undeducted Purchase Price
The UPP is the amount that you have contributed towards the purchase price of your pension.
Subsection 27H(2) of the ITAA 1936 operates to reduce the taxable amount of a pension received by the personal contributions made by a taxpayer for which no income tax deduction was allowed. This applies regardless of whether the fund paying the pension is located in Australia or overseas.
As such, the part of a taxpayer's pension which represents a return to them of their personal contributions is free from tax. This tax-free portion is called the deductible amount of the UPP.
Therefore, if you have made personal contributions towards your country X pension, you may be eligible to claim a deductible amount of the UPP of your pension. This will subsequently reduce the taxable amount of your pension.
If you have any questions relating to the UPP deductible amount please contact our Superannuation Information Line on 13 10 20. We have also included the relevant form for you to complete if you believe that you are entitled to a UPP deductible amount and wish us to calculate it for you.