Edited version of your written advice

Authorisation Number: 1013024309298

Date of advice: 27 May 2016

Ruling

Subject: Foreign Pension

Question 1

Is the pension you receive from State Z in the foreign country assessable in Australia?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You are an Australian citizen

You are a resident of Australia for tax purposes

You lived in the foreign country for XX years

You were employed by City X in State Z for X of those years

A condition of your employment required you to contribute to the State Z pension program

You receive two Country Y government pensions, one from State Z and one from the foreign country federal program

Your pensions are coupled and the federal pension is reduced by your State Z pension

Relevant legislative provisions

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

Convention between the Government of Australia and the overseas country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1986] ATS 16 Articles 18 and 19

International Tax Agreements Act 1953 Sections 4 and 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.

Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

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 Convention between the Government of Australia and the foreign country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income [1986] ATS 16 (foreign country convention) is listed in section 5 of the Agreements Act.

The agreement between Australia and the foreign country operates to avoid the double taxation of income received by residents of Australia and the foreign country.

Article 19 of the foreign country convention considers the tax treatment of governmental remuneration.

Article 19 states that governmental salaries, wages and other similar remunerations including pensions paid from funds of one of the Contracting States, of a state or other political subdivision thereof or of an agency or authority of any of the foregoing for labour or personal services performed as an employee of any of the above in the discharge of governmental functions to a citizen of that State shall be exempt from tax by the other Contracting State.

Article 18(2) of the foreign country convention states, social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the foreign country shall be taxable only in the first-mentioned State.

City X and State Z are political subdivisions of the foreign country, and therefore both the State Z pension and the federal pension are exempt from tax in Australia.

You may be required to report the foreign pension on your income tax return at IT4 Target Foreign Income which is an information label.