Edited version of your written advice

Authorisation Number: 1012683528136

Ruling

Subject: Foreign pension - Country X

Income Tax - Assessable income - pensions and annuities - foreign sourced- Country X

Question 1

Is the pension you receive from Country X assessable income in Australia?

Answer

Yes.

Question 2

Are you entitled to a deductible amount in respect of the undeducted purchase price of your overseas pension?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts and circumstances

You lived and worked in Country X for X years prior to moving to Australia.

You had a superannuation fund in Country X that you contributed to while working there.

You contributed to the superannuation fund with after tax money for 25 years.

The total amount paid to Country X fund from Australia is $xx,000.

You have been receiving a monthly pension payment since you reached retirement age.

Relevant legislative provisions

Subsection 6-5(1) of the Income Tax Assessment Act 1997

Subsection 6-5(2) of the Income Tax Assessment Act 1997

International Tax Agreements Act 1953

Section 27H of the Income Tax Assessment Act 1936

Reasons for decision

Income

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

Pension payments are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on Australian sourced income received by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

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

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X Agreement is listed in section 5 of the Agreements Act.

The Country X Agreement operates to avoid the double taxation of income received by Australian and Country X residents.

Article 18 of the Country X Agreement deals with pensions and annuities. Paragraph 1 provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia. Paragraph 1(b) states the pensions and other payments received from Country X under Military Insurance legislation shall be exempt from Australian tax as long as they are exempt from Country X tax.

As you are an Australian resident for taxation purposes and the pension is paid by your superannuation fund and is not a military pension, the pension is assessable in Australia under subsection 6-5 (2) of the ITAA 1997.

Undeducted purchase price

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in assessable income the amount of any foreign pension or annuity derived by a taxpayer during a year of income reduced by the annual deductible amount.

The deductible amount is deemed to be a return of part of your contribution towards the purchase of the pension. The deductible amount is calculated based on the undeducted purchase price (UPP) of your pension.

The UPP is the amount you contributed towards the purchase price of your pension for which you did not claim, and were not eligible to claim, a tax deduction in Australia. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension.

Under subsection 27H(2) of the ITAA 1936, the annual deductible amount of a superannuation pension is ascertained in accordance with the formula:

A (B - C) D

where:

A is the relevant share of the pension payable to the taxpayer in relation to the year of income (if all of the pension is payable to the taxpayer, A = 1)

B is the amount of the UPP of the pension

C is the residual capital value, if any, else nil, and

D is the relevant number in relation to the pension. This is either the number of years in the term of the pension or your life expectation factor if the pension is paid during your lifetime and not thereafter.