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Edited version of your written advice
Authorisation Number: 1012690255664
Ruling
Subject: Exempt foreign pension income
Question and answer:
Are armed forces pension lump sum payments which are granted tax exempt status in country A UK considered tax exempt in Australia?
No.
This ruling applies for the following period
Year ending 30 June 2014
The scheme commenced on
1 July 2013
Relevant facts and circumstances
You were born in Australia.
You are a resident of Australia.
You went to live in Country A.
You joined the foreign country's armed forces.
While you were serving in the defence forces of that country your pension scheme was changed.
The old pension scheme paid the pension at age 55 with no lump sum.
The new pension scheme pays from age 60 with a lump sum of 3 years pension tax free as a gratuity.
The tax free status is on all Country A's armed forces pension lump sums.
You are over 60 years of age.
You have returned to Australia to live.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1997 Section 6-15
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 53-20
Income Tax Assessment Act 1997 Section 52-65
International Tax Agreements Act 1953
Reasons for decision
Section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that assessable income of a resident taxpayer includes statutory income amounts which 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) of the ITAA 1997).
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 pension s are included in assessable income.
Section 6-15 of ITAA 1997 provides that if an amount is exempt income, it will be excluded from assessable income section 6-20 of the ITAA 1997 specifies that an amount of ordinary income is exempt income if it is made exempt from income tax laws by provision of the ITAA 1997 of another Commonwealth law.
Section 53-20 of ITAA 1997 gives exemption to Country A service pensions where they meet the list of pensions exempt under section 52-65 of the ITAA 1997.
Your lump sum payment and service pension are not listed as being exempt under Section 52-65 of the ITAA 1997. Therefore the lump sum payment and service pension income is not exempt from tax in Australia under section 53-20 of the ITAA 1997.
In determining liability to Australian tax of foreign sourced income received by a 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 overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
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 A agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and Country A.
Article 17(1) of the Agreement provides that pensions (including government pensions) and annuities paid to resident of Australia shall be taxable only in Australia. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).
Therefore, the Country A pension received by you is included in your assessable income under section 27H of the ITAA 1936, and forms part of your statutory income under subsection 6-10(4) of the ITAA 1997.
Hence, the lump sum payment and service pension you received from Country A are assessable in Australia under section 6-10 of the ITAA 1997.