Edited version of private advice

Authorisation Number: 1051901891362

Date of advice: 23 September 2021

Ruling

Subject: Foreign income and foreign income tax offsets

Question 1

Are the Social Security payments from Country A included in your tax return as assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Does section 305-70 of the ITAA 1997 apply to the payments made to you from the Country A 403(b) retirement plan (the retirement plan)?

Answer

No.

Question 3

If the answer to question 2 is no, are the retirement plan distribution payments from the made to you from the Country A 403(b) plan included in your tax return as assessable income under section 6-10 of the ITAA 1997?

Answer

Yes.

Question 4

If the answer to question 2 or 3 is yes, is a Foreign Income Tax Offset (FITO) available for any federal tax withheld from these payments by the Country A tax authorities?

Answer

Yes.

Question 5

Are the quarterly distribution payments received from a lifetime Annuity with a Country A retirement plan assessable income under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 6

Do you have a deductible amount of UPP on lifetime Annuity with a Country A retirement plan (foreign life annuity purchased)?

Answer

Yes. The annual deductible amount is $x.

Question 7

If the answer to question 5 is yes, is a FITO available for any federal tax withheld from these payments by the Country A tax authorities?

Answer

No - as the foreign annuity payments are only assessable in Australia under Article 18(3) of the DTA.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Country A.

You and your spouse are both retired.

You were previously working in Country A in the education sector as an employee of an educational institution (your former employer), where you made voluntary contributions to a Country A 403(b) retirement plan and also to a lifetime annuity within the relevant Country A retirement plan (the retirement plan).

Your former employer is a Government entity known as a Land Grant Institution, supported financially by a State of Country A. Your former employer is not a private educational institution.

You ceased working in Country A in mid- 20XX.

In mid to late 20XX you started to receive payments from a lifetime Annuity with a Country A retirement plan. You receive the annuity payments on a quarterly basis and Federal tax is withheld in Country A.

The lifetime annuity is reversionary to your spouse and has a twenty-year guarantee period. The total amount converted to purchase the annuity was Country A$x. This included your own contributions of Country A$x.

Upon retiring from your Country A employment at age 67 (in mid to late 20XX), you moved to Australia where you have been residing permanently since mid to late 20XX.

As such, you have been an Australian resident for taxation purposes since mid to late 20XX.

In summary, since moving to Australia in 20XX, you have been receiving three sources of foreign income from Country A as follows:

•         Country A Social security benefit payments;

•         Distributions from the Country A 403(b) retirement plan; and

•         Distributions from a Lifetime Annuity from the Country A retirement plan.

Country A Social security payments

You have received monthly Social security payments from Country A since mid to late 20XX, and the payments you have received since mid- 20XX are as follows (where tax was withheld in Country A for all payments):

•         Country A $X for the period 1 July 20XX to 31 December 20XX.

•         Country A$X for the period 1 January 20XX to 31 December 20XX.

•         Country A$X for the period 1 January 20XX to 30 June 20XX.

The Social security payments are determined by the relevant Country A authorities based on the number of years of employment, which then determines the monthly payment amount.

Required minimum distribution (RMD) from the Country A 403(b) plan

As stated above, you voluntarily made contributions towards a Country A 403(b) retirement plan with a retirement fund in Country A, having joined the plan in late 20XX, a few years following your retirement. The Country A 403(b) plan was entirely voluntary and unrelated to your previous employment in Country A. Since retirement you have been receiving the 403(b) retirement plan (scheme) payments annually from the Country A retirement plan and you receive an annual Country A tax statement for each distribution paid during the calendar year. You receive a minimum amount every calendar year which was called the "required minimum distribution" (RMD) and this amount did not have any tax withheld in Country A which commenced in late 20XX. Details of your benefits are contained in a certificate and companion contract.

You have been advised by the 403(b) retirement plan that you could not withdraw fund over and above the routine annuity payments (see below) until age 70.5.

You did not begin to make lump sum withdrawals from the 403(b) plan until you moved to Australia in 20XX, where you were age x by this time.

This plan does allow you withdraw more than the minimum each year. When this occurs, the withdrawal is subject to Federal withholding tax in Country A. It is noted that a 403(b) is similar to a 401(k) plan, except a 403(b) plan is designated for public school districts, higher education institutions and non-profit organizations to provide a way for employees to save for their retirement.

The RMD amounts are approximately $x annually paid mid to late of each year. These payments become progressively smaller each year because of the steady reduction of the principal held in the 403(b) plan. The balance of the 403(b) plan was $x as at early 20XX.

Your first lump sum withdrawal from the 403(b) plan was in mid to late 20XX, when you requested Country A$x and you received this amount less a country A tax amount of Country A$X was paid to the Country A tax authorities.

You have supplied a minimum distribution certificate which specifies a particular certificate number (J), and the minimum distribution certificate also specifies a particular companion contract number (K).

The payments you received during the 20XX-XX and 20XX-XX financial years are as follows:

20XX-XX - RMD was Country A$x, no Country A federal withholding tax - paid in mid to late 20XX.

20XX-XX - RMD was Country A$x, with Country A$x federal withholding tax - paid in mid to late 20XX.

No amounts have been contributed to the 403(b) plan from any sources since you became an Australian resident for taxation purposes.

Distributions from the Lifetime Annuity from the Country A retirement plan

You began receiving payments from the lifetime annuity shortly following your retirement in mid to late 20XX whilst you were still residing in Country A, and this is shortly after you purchased the annuity. You obtained a letter from the Country A retirement plan dated early 20XX which noted that the amount converted to the annuity in 20XX was Country A$x. You continue to receive quarterly distribution annuity payments from the Country A retirement plan until you pass away, and you also receive an annual Country A tax statement for the distributions paid during the calendar year. The annuity attracts an amount of Federal tax to be withheld which is included on the annual Country A tax statement. The annuity payments you received during the 20XX-XX and 20XX-XX financial years are as follows:

20XX-XX - Country A$x - Tax Withheld - Country A$x

20XX-XX - Country A$x - Tax Withheld - Country A$x

It is noted that the Country A tax statements, or the individual confirmation of annuity income for each quarter do not provide an undeducted purchase price (UPP).

Assumptions

The Country A Voluntary 403(b) Plan rules adopted with effect from 1 November 20XX apply to your interests in the plan.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 10-5

Income Tax Assessment Act 1997 subsection 295-95(2)

Income Tax Assessment Act 1997 section 305-70

Income Tax Assessment Act 1997 Division 770

Income Tax Assessment Act 1997 subsection 995-1(1)

International Tax Agreements Act 1953

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 subsection 99B(1)

Income Tax Assessment Act 1936 paragraph 99B(2)

Income Tax Assessment Act 1936 subsection 481(3)

Superannuation Industry (Supervision) Act 1993 subsection 10(1)

Reasons for decision

Question 1

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 Government of the Country A for the avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income (The Country A Convention) is listed in section 5 of the Agreements Act.

The Country A Convention operates to avoid the double taxation of income received by residents of Australia and Country A.

Article 18 of the Country A Convention considers the tax treatment of Pensions, Annuities, Alimony and Child Support. The relevant paragraph in your case is paragraph 2 of Article 18 of the Country A Convention.

Paragraph (2) of Article 18 states that 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 Country A shall be taxable only in the first-mentioned State.

In your case, you are a citizen of Country A and you are also an Australian resident for taxation purposes. As such your Country A social security pension is not taxed in Australia under Article 18 of the Country A Convention and is not required to be declared in your Australian tax return.

Question 2

Summary

The 403(b) plan is not considered a 'foreign superannuation fund' for the purposes of Subdivision 305-B of the ITAA 1997. Therefore, section 305-70 of the ITAA 1997 does not apply to payments you received from the plan.

Detailed Reasoning

Lump sum payments received from certain foreign superannuation funds

Subdivision 305-B of the ITAA 1997 sets out the tax treatment of superannuation lump sum benefits paid from foreign superannuation funds and schemes for the payment of benefits in the nature of superannuation upon retirement or death.

Where a lump sum paid from a foreign superannuation fund is received more than six months after Australian residency, section 305-70 of the ITAA 1997 applies to include any applicable fund earnings in assessable income.

Before determining whether an amount is assessable under section 305-70 of the ITAA 1997, it is necessary to ascertain whether the payment is being made from a foreign superannuation fund. If the entity making the payment is not a foreign superannuation fund (or scheme for the payment of benefits in the nature of superannuation), section 305-70 of the ITAA 1997 will not apply to the payment.

Meaning of 'foreign superannuation fund'

A 'foreign superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as follows:

(a) a *superannuation fund is a foreign superannuation fund at a time if the fund is not an *Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Relevantly, subsection 295-95(2) of the ITAA 1997 defines 'Australian superannuation fund' as follows:

A *superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total *market value of the fund's assets attributable to *superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

*To find definitions of asterisked terms, see the Dictionary, starting at section 995-1.

Thus, a superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a foreign superannuation fund. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA provides that:

superannuation fundmeans:

(a)  a fund that:

(i)        is an indefinitely continuing fund; and

(ii)       is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Meaning of 'provident, benefit, superannuation or retirement fund'

The High Court examined both the terms 'superannuation fund'and 'fund' in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 (Scott). In that case, Justice Windeyer stated:

...I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

The issue of what constitutes a provident, benefit, superannuation or retirement fund was discussed by the Full Bench of the High Court in Mahony v. Federal Commissioner of Taxation (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony). In that case, Justice Kitto held that a fund had to exclusively be a 'provident, benefit or superannuation fund' and that 'connoted a purpose narrower than the purpose of conferring benefits in a completely general sense...'. This narrower purpose meant that the benefits had to be 'characterised by some specific future purpose'.

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'. In other words, though a fund may contain provisions for retirement purposes, it could not be accepted as a superannuation fund if it contained provisions that benefits could be paid in circumstances other than those relating to retirement.

A similar approach was adopted by Taylor J and Windeyer J who said:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

In Baker v FC of T 2015 ATC 10-399; (2015) AATA 469 (Baker), it was said:

...for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.

In addition, under section 62 of the SISA, a regulated superannuation fund must be 'maintained solely' for the purposes of providing benefits to a member when the events occur:

•         on or after retirement from gainful employment;

•         attaining a prescribed age; or

•         on the member's death (this may require the benefits being passed on to a member's dependants or legal representative).

Notwithstanding the SISA applies only to 'regulated superannuation funds' (as defined in section 19 of the SISA), and foreign superannuation funds do not qualify as regulated superannuation funds as they are established and operate outside Australia, the Commissioner views the SISA (and the Superannuation Industry (Supervision) Regulations 1994 (SISR)) as providing guidance as to what 'benefit' or 'specific future purpose' a superannuation fund should provide.

As reiterated by Senior Member O'Loughlin in Baker at paragraph 16,

... a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.

The information available provides that benefits can be withdrawn from the 403(b) plan in the following circumstances:

•         severance from employment at any age;

•         attaining the age of 59 1/2;

•         on death or disability; or

•         financial hardship.

Members of the 403(b) plan are also permitted to obtain loans from the plan. A member may have two loans outstanding at a time; one home loan and one general (all purpose) loan are allowed.

In Baker Senior Member O'Loughlin made note of the similarities between the retirement savings regimes in Country A and Australia. He also recognised there were fundamental differences between the regimes.

It is because of these differences, such as the non-preservation of benefits until retirement, the 403(b) plan does not meet the definition of a superannuation fund for the purposes of Subdivision 305-B of the ITAA 1997.

Furthermore, as benefits can be paid prior to retirement it is not a scheme for the payment of benefits in the nature of superannuation on retirement or death.

Consequently, Subdivision 305-B of the ITAA 1997 does not apply to any lump sum payments received from the 403(b) plan.

Question 3

Summary

Income that is withdrawn from the 403(b) plan is similar to a distribution from a trust. Any amounts distributed (withdrawn) or credited from the 403(b) plan are assessable under subsection 99B(1) of the Income Tax Assessment Act 1936 (ITAA 1936) less any amounts excluded under subsection 99B(2).

Detailed reasoning

You have an interest in a 403(b) plan with a Country A retirement fund, which is an individual retirement fund. The nature of a retirement fund is similar to a trust as the fund holds property, such as cash, shares or securities, for the benefit of the account holder.

A foreign trust is defined in subsection 481(3) of the Income Tax Assessment Act 1936 (ITAA 1936) as a trust which is not an Australian trust, and which did not result from a will or an intestacy in relation to the estate of a deceased person.

The 403(b) plan is a foreign trust as defined in subsection 481(3) of the ITAA 1936 and is therefore a foreign investment fund (FIF). The 403(b) plan is not a superannuation fund for the purposes of the ITAA 1997) and the ITAA 1936 as it allows for withdrawals for pre-retirement purposes. Therefore the 403(b) plan is not established solely for the provision of retirement benefits.

Repeal of FIF measures

On 14 July 2010, the FIF measures were repealed and do not apply from the 2010-11 income year onwards.

If you have an interest in a FIF, you will be subject to the general tax rules applicable to your circumstances - for example, the general tax rules relating to trust income.

Assessability of trust income

Section 6-10 of theITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 provides that for an Australian resident, your assessable income includes statutory income derived from all sources, whether in or out of Australia, during the income year.

Section 10-5 of the ITAA 1997 lists certain statutory amounts that form part of assessable income. Included in this list is income derived pursuant to section 99B of the ITAA 1936.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, the amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) and has the effect that the amount to be included in assessable income under subsection 99B(1) is not to include any amount that represents either:

•         the corpus of the trust (paragraph 99B(2)(a) of the ITAA 1936)

•         amounts that would not have been included in the assessable income of a resident taxpayer (paragraph 99B(2)(b) of the ITAA 1936), and

•         amounts previously included in the beneficiaries income under section 97 of the ITAA 1936 (paragraph 99B(2)(c) of the ITAA1936).

Paragraph 99B(2)(a) of the ITAA 1936 requires regard to be had to whether or not the amount derived by a trust estate was of a kind that would have been assessable if derived by a resident taxpayer. Thus, for example, if, in accordance with the terms of the trust, income were accumulated and added to corpus and the capitalised amount is subsequently paid or applied for the benefit of a beneficiary, the beneficiary would be assessable on the amount provided (subject to other paragraphs of subsection 99B(2) of the ITAA 1936).

As withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from a foreign trust are assessable under subsection 99B(1) of the ITAA 1936.

However, the amount assessable under subsection 99B(1) of the ITAA 1936 does not include amounts listed under subsection 99B(2) of the ITAA 1936.

A capital distribution, to the extent that it forms part of the corpus of the trust, would come within paragraph 99B(2)(a) of the ITAA 1936. Distributions, to the extent that comes within subsection 99B(2) of the ITAA 1936, would be excluded from amounts assessable under subsection 99B(1) of the ITAA 1936.

Therefore, only income accumulated in the 403(b) plan over the years that is normally taxable in Australia and had not been previously subjected to tax in Australia would be assessable to you under subsection 99B(1) of the ITAA 1936. For example, if the amounts in the 403(b) plan were amounts paid in by you and interest earned over the years, all of the interest would be assessable when received by you, but not your contributions.

Amounts assessable under subsection 99B(1) of the ITAA 1936 form part of a taxpayers assessable income under subsection 6-10(4) of the ITAA 1997.

In your case, as you have withdrawn lump sum amounts from the 403(b) plan, at the time of the withdrawal it is deemed that income has been paid to you or applied for your benefit. Therefore, as withdrawn amounts are similar to a distribution from a trust, any amounts distributed (withdrawn) or credited from your 403(b) plan are assessable under subsection 99B(1) of the ITAA 1936 less any amounts that would fall under subsection 99B(2).

In addition, the whole amount of the earnings is assessable in Australia not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

This is consistent with the Commissioners view in ATO Interpretative Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income.

Question 4

Foreign Income Tax Offset (FITO)

If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.

To qualify for a FITO you must meet all of the following criteria:

•         You must have paid the foreign tax on the foreign income,

•         The foreign tax must be a tax which you were personally liable for, and

•         The income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.

The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you.

Whether you are eligible for a foreign tax credit is dependent on the relevant double tax agreement between Australia and Country A.

Australia has a tax treaty with the Country A (The Country A Convention). The Country A Convention operates to avoid the double taxation of income received by Australian and Country A residents.

Under Article 21 of the Country A Convention your share of distributions from Country A are taxed in the country of source and may be taxed in Australia. However, Article 22 of the Country A convention provides for relief from double taxation.

Accordingly, you will be entitled to a foreign income tax offset in respect of the foreign tax paid in Country A as long as you paid income tax to the Country A tax authorities, and the tax paid is related to a taxing event in Australia.

In your case it is it is the gross amount received converted to AUD, less the amount that represents deposits to the 403(b) plan (all of the contributions), that is the amount assessable under subsection 99B(1) of the ITAA 1936.

As such the FITO to be claimed needs to be proportioned on the basis that you can only claim the FITO on the foreign tax paid on the amount assessable here (i.e. you can't claim the whole amount as a FITO unless this is the same amount assessable in Country A for example).

Questions 5 and 6

Subsection 6-5(2) of the 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.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that 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 those provisions about assessable income. Included in this list is section 27H of the ITAA 1936 which provides that annuities and pensions paid from a foreign superannuation fund or foreign scheme for the payment of superannuation benefits are included in assessable income.

In your case, you are receiving lifetime annuity payments from a Country A retirement plan. As such, you are receiving an annuity paid from a foreign scheme for the payment of superannuation benefits.

Therefore, your lifetime annuity payments are assessable in Australia under section 27H of the ITAA 1936 as it is an annuity paid from a foreign scheme for the payment of superannuation benefits.

Annual deductible amount of lifetime annuity

The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. The tax-free portion is called the UPP deductible amount.

Under section 27H of the ITAA 1936 the income of a taxpayer includes the amount of any annuity derived by the taxpayer during the year of income excluding the deductible amount (exempt income).

The deductible amount is calculated using the following formula

A = relevant share of the annuity payable to you

(as all the annuity is payable to you then A = 1)

B = is the amount of the undeducted purchase price of the annuity, which in your case is Country A$x.

C = is the residual capital value (if any), which in your case is nil.

D = is the relevant number, which in your case is 21.54.

As your annuity is reversionary the relevant number will be the longest of your life expectation factor (LEF), your wife's LEF or the annuity guarantee period of twenty (20) years.

The Australian life tables are published by the Australian Government Actuary, and the life expectancy factor is taken from when the pension first became payable. From the appropriate life table the LEF for a 67 year old male is 14.79 and the LEF for a 63 year old female is 21.54.

By substituting the amounts into the formula, the annual deductible amount of the annuity payments received is Country A$x.

As both the assessable and exempt parts of the annuity payments are ordinary income, the same exchange rate will apply in translating the annuity payments and the deductible amount.

Where certain requirements are satisfied you may use the average exchange for the year in translating the deductible amount. More details about this can be found in Taxation Determination TD 2006/54 Income tax: how does a taxpayer work out the amount to be included in assessable income under section 27H of the Income Tax Assessment Act 1936 for a superannuation pension or annuity that is payable in a foreign currency?

More information about exchange rates is available from our website by entering 'QC 16583' in the search box on the top right of the page.

The Country A Convention

As noted above, annuity payments are assessable income under section 27H of the ITAA 1936.

As noted in the reasons for decision in question 1, 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.

Article 18 of the Country A Convention specifically deals with the taxation of pensions and annuities income. This Article provides that, subject to Article 19 of the Country A Convention, Australia has the sole taxing rights over pensions and annuities income paid to an individual who is a resident of Australia.

The quarterly distribution payments received from a lifetime Annuity with the Country A retirement fund fall within the definition of an annuity under Article 18(5) of the Country A Convention.

Article 19 of the Country A Convention explains that remuneration, including pensions, paid from funds of Country A for labour or personal services performed as an employee in the discharge of governmental functions to a citizen of Country A shall be exempt from tax in Australia.

The relevant documents and practices in relation to Article 19 of the Country A Convention indicate that Country A considers the phrase governmental function should be given a very narrow interpretation and that Australia has accepted this position for the purposes of the Country A Convention. This interpretation excludes non-core government functions from being a governmental function for the purposes of Article 19 of the Country A Convention.

Paragraph 88 of Taxation Ruling TR 2005/8 Income tax: the meaning of particular terms in the Government Service Articles of Australia's tax treatiesprovides that the term in discharge of governmental functions in Country A is understood to encompass functions traditionally carried on by a government such as military, diplomatic service, tax administrators and activities that directly support the carrying out of those functions. It would not include functions that are commonly found in the private sector (e.g. education, health care and utilities).

You were not engaged in the discharge of government function for the purposes of Article 19 of the Country A Convention. As such, the annuity you receive is not covered by Article 19 of the Country A Convention. Instead, it would fall for consideration under Article 18 of the Country A Convention.

Accordingly, the quarterly distribution payments received from a lifetime Annuity with the Country A retirement fund are assessable only in Australia under Article 18(3) of the Country A Convention.

Question 7

Summary

Where foreign tax is paid in relation to income derived by an Australian resident from foreign sources, a credit (called a foreign income tax offset - FITO) may be allowed against the Australian income tax payable on that foreign income.

However, if foreign tax was not imposed in accordance with the relevant double tax agreement, then a foreign income tax offset is not available.

In your case, as Article 18(3) of the Country A Convention gives Australia the exclusive taxing rights to this type of income, you are not entitled to a FITO.

Detailed reasoning

Article 23 of the Country A Convention deals with the elimination of double taxation. It provides that, subject to the provisions of the law of Australia which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia, Country A tax paid under the law of Country A and in accordance with the Country A Convention, in respect of income derived by a resident of Australia from sources in Country A shall be allowed as a credit against Australian tax payable on that income.

As such, under Article 23 of the Country A Convention, if Country A tax is paid under the law of Country A and in accordance with the Country A Convention in relation to income derived by an Australian resident from sources in Country A, a credit may be allowed against the Australian tax payable on that income.

Foreign income tax offsets

The foreign income tax offset provisions, which apply to income years from 1 July 2008, are set out in Division 770 of the ITAA 1997.

Subsection 770-10(1) of the ITAA 1997 provides that a FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Section 770-5 of the ITAA 1997 states that the object of Division 770 is to relieve double taxation where you have paid foreign income tax on amounts included in your assessable income, and you would apart from Division 770, pay Australian income tax on the same amounts. Subsection 770-5(2) states:

'To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.'

The taxpayer must have paid the foreign income tax before an offset is available. A taxpayer is deemed to have paid the foreign income tax if the foreign income tax has been withheld from the income at its source.

Application to your circumstances

As noted above, the quarterly distribution payments received from the Country A retirement fund are assessable only in Australia under Article 18(3) of the Country A Convention.

As such, Country A do not have any taxing rights on these types of payments in accordance with Article 18(3) of the Country A Convention.

Therefore, you are not entitled to a FITO under section 770-10 of the ITAA 1997 as the income is only assessable in Australia.