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Edited version of your written advice
Authorisation Number: 1012936916802
Date of advice: 14 January 2016
Ruling
Subject: Taxation of terminal grant
Question 1
Is the terminal grant received from Country A assessable in Australia?
Answer
Yes
This ruling applies for the following periods:
Income year ending 30 June 2016.
The scheme commences on:
1 July 2015.
Relevant facts and circumstances
You are a resident of Australia for taxation purposes.
You are due to retire from the Australian Defence Force at compulsory retirement age on a date in the relevant income year.
Between 19XX-YY and 19ZZ-WW, you served in Country A's department of Defence.
On a date in the relevant income year, you will become entitled to an annual pension from Country A's department of Defence, as well as a tax-free terminal grant.
Your date of birth is during the 19VV income year.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 52-10(1A)
International Tax Agreements Act 1953 Section 4
International Tax Agreements Act 1953 Schedule 1 Article 17.
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.
Assessable income consists of ordinary income and statutory income provided it is neither exempt nor non-assessable non-exempt income.
In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.
Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three 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 listed in section 5 of the Agreements Act.
The agreement operates to avoid the double taxation of income received by residents of Australia and Country A.
Article 17 of the DTA between Australia and Country A considers pensions and annuities. It says that pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State.
In your case you are a resident of Australia for taxation purposes and therefore the terminal grant will be taxed in Australia under Article 17.
There is nothing in the DTA between Australia and Country A which exempts your terminal grant from being assessable in Australia.