Edited version of your written advice

Authorisation Number: 1051407344480

Date of advice: 22 August 2018

Ruling

Subject: Foreign income – pension payments

Question 1

Will the 40% share of the taxpayer’s foreign pension schemes payable to their former spouse be assessable to the taxpayer for Australian taxation purposes as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA1997)?

Answer

Yes

Question 2

Will the 40% share of the taxpayer’s foreign pension schemes attributable to their former spouse be assessable to the taxpayer for Australian taxation purposes under Division 6A of the Income Tax Assessment Act 1936?

Answer

No

Question 3

Will the 40% share of the taxpayer’s foreign pension schemes attributable to their former spouse be assessable to the taxpayer for Australian Taxation purposes under the Country A convention?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

Your country of origin is Country A.

You are a citizen of Country A and Country B.

You have self-assessed as a Country B resident for taxation purposes.

You are not a Country A resident for Country A taxation purposes.

You have been a citizen of Country B since 20XX.

You were employed in Country A.

You then worked in Country C.

You are expected to receive distributions from the registered schemes.

You receive pension income from a superannuation fund in respect of previous employment in Country A.

You divorced your former spouse under Country A.

As part of the divorce proceedings you were issued a consent order by family court in Country A.

Your 40% share of your Country A pension will be paid directly to your former spouse.

Your former spouse is a Country A tax resident.

Your balance of the pension will be payable to you personally in Country B.

You arrived in Country B in 20XX then went to Country D 20XX and you then returned to Country B.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-5 (4)

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1936 Section 102B

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 1, Article 17

Reasons for decision

Question 1.

Generally, income in the form of a pension is included in the assessable income of an Australian resident taxpayer under the provisions of section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

● are earned

● are expected or relied upon

● have an element of periodicity, recurrence or regularity

● replace income.

Where an amount of ordinary income is applied or dealt with in any way on behalf of the taxpayer or on their direction, it will be considered a constructive receipt under subsection 6-5(4) of the ITAA 1997. Your Country A pension is considered to be ordinary income and is derived by you.

Derived

In Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246 at 261; [1927] HCA 49, Isaacs J said that 'derived' simply means 'obtained' or 'got' or 'acquired' and that 'all income is derived from something and by someone'. Isaacs J also added in Federal Commissioner of Taxation v. Thorogood (1927) 40 CLR 454 at 458; [1927] HCA 36 that 'derived' does not necessarily mean actually received, although receipt is the ordinary mode of derivation.

Essentially, income is derived when it 'comes in' or 'comes home', in whatever sense is most appropriate in the particular circumstances: Commissioner of Taxes (SA) v. Executor Trustee and Agency Co of South Australia Ltd (1938) 63 CLR 108; [1938] HCA 69.

The principle of constructive receipt involves the notion of control of, or the capacity to control, an amount that is receivable or otherwise held in a manner satisfying the concept of derivation. If an amount is credited to an employee in the books of his employer and can be drawn by the employee at any time, then it is derived at the time it was so credited and made available to the employee: paragraph 4 of Taxation determination TD 93/242 Income tax: what is the income tax treatment of a deferred salary payment agreement? However, merely crediting an amount in an account or record does not necessarily mean that the amount has been received.

However, when an Australian resident taxpayer is receiving a foreign pension, the provisions of any double taxation agreement between Australia and the relevant foreign country must be considered to determine which country has taxing rights over the foreign pension. Further information is discussed further on in question 3’s detailed reasoning on the double taxation agreement articles and implications.

Question 2

According to Section 102B(1) of the Income Taxation Assessment Act 1936 (ITAA 1936) applies where a right to receive income from property is transferred, otherwise than by a will or codicil, by a person to an associate of the transferor for a period that will, or may for any reason other than death of any person or the associate becoming under a legal disability, terminate before that prescribed sate, any income that:

(a) is derived from the property;

(b) is paid to, or applied or accumulated for the benefit of:

i. The associate; or

ii. Any other associate of the transferor to whom a right to receive the income from the property has been transferred (whether by the first-mentioned associate or any other person) after the first-mentioned transfer;

and

(c) would, if the first-mentioned transfer had not been made, have been included in the assessable income of the transferor;

shall be treated for the purposes of this Act as if the first-mentioned transfer had not been made.

Section 102A(1) Interpretation, states an:

● Associate, in relation to a person, means any person who is an associate, within the meaning of subsection 318, in relation to the person.

● Property means any property whether real or personal.

● Right to receive income from property means a right to have income that will or may be derived from property paid to, or applied or accumulated for the benefit of, the person owning the right.

An associate, in relation to a person, means any person who is an associate, within the meaning of section 318.

Subsection 318(1) defines an associate of a natural person as (among others) a ‘relative’ of the primary entity.

A relative is defined in subsection 995-1(1) to mean:

a) The person’s spouse; or

b) The parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of that person, or of that person’s spouse; or

c) The spouse of a person referred to in paragraph b.

In this case, the taxpayer’s former spouse is not considered to be an associate according to subsection 318(7) 1936 Act provides that a spouse is:

a) A spouse who is legally married to the person but living separately and apart from the person on a permanent basis; or

b) A spouse within the meaning of paragraph (a) of the definition of a spouse in subsection 993-1(1) who is living separately and apart from the person on a permanent basis.

Accordingly, section 102B does not apply as your 40% share of the pension income is transferred to your former spouse who is not deemed to be an associate.

Question 3

Australia has a double taxation agreement with Country A.

An article of the Country A convention provides that pensions including government pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Therefore in your case, as you are an Australian resident for taxation purposes, the Country A pension that you receive is not exempt from income tax in Australia and is included in your assessable income under section 6-5 of the ITAA 1997.

This includes the entire amount you receive from all the Registered Schemes.