Edited version of private advice

Authorisation Number: 1052059882034

Date of advice: 5 December 2022

Ruling

Subject: Foreign pension income

Question 1

On the basis that you return to Australia, and become a resident of Australia for tax purposes, will your public service pension be only subject to income tax in Country A and not Australia?

Answer

Yes.

Question 2

If the answer to question 1 is No, would Australia determine your income tax liability on this pension income based upon the Australian resident tax rates?

Answer

N/A.

Question 3

If the answer to question 1 is No, would a foreign income tax offset be allowed for any Country A, income tax paid against your Australian income tax liability?

Answer

N/A.

Question 4

On the basis that you return to Australia, and become an Australian resident for tax purposes, will your social security pension; not being taxable in Country A be taxable in Australia only?

Answer

Yes.

Question 5

If the answer to question 4 is Yes, would Australia determine your income tax liability on your social security pension income based upon Australian resident tax rates?

Answer

Yes.

Question 6

If the answer to question 1 is Yes, would a foreign income tax offset be allowed for any Country A, income tax paid on his social security pension against your Australian income tax liability?

Answer

Yes.

Question 7

Will you be required to lodge an annual Australian income tax return if your only source of income is the pension income described above?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 202X

Year ending 30 June 202X

Year Ending 30 June 202X

The scheme commences on:

X X 20XX

Relevant facts and circumstances

You and your spouse are currently residing in Country A.

You are both Country A nationals and Australian citizens.

You retired on X X 20XX.

Prior to your retirement, you were employed by the Federal Agency, in Country A, as an engineer.

Your pensions comprise, the following:

Social Security Pension

A social security pension. This is compulsory insurance for all persons who live and work in Country A. The mandatory first pension consists mainly of old age and survivors' insurance. Its objective is to ensure you have enough income to live on when you reach retirement. It is based on the concept of solidarity: the working population pays contributions which finance the pensions of the retired population. Those who earn higher wages and pay higher contributions support those who are less well-off and pay lower contributions. The insurance provides assistance in the event of the death of your spouse, or of both parents if you are a minor, to prevent people from being placed in a difficult financial situation from one day to the next.

Public service pension

The second pension is the occupational pension and insurance scheme. This is compulsory for all persons who work in Country A and have an annual income of at least XX,XXX per annum. You worked for the government in Country A. This specific fund is dedicated to only government employees.

Assumptions

You will relocate from Country A to Australia for the purposes of taking up residence.

When moving to Australia you will satisfy the residency test and be considered a resident of Australia for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 section 161

Income Tax Assessment Act 1997 section 6-5

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

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

International Tax Agreements Act 1953

Convention between Australia and Country A for the Avoidance of Double Taxation with respect to Taxes and Income, with Protocol [20XX]

Reasons for decision

A foreign superannuation fund is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (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.

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 funds 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.

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.

Subsection 995-1(1) of the ITAA 1997, defines a superannuation fund as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA), that is:

(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;

There is no definition for the phrase provident, benefit, superannuation or retirement fund in either the ITAA 1997, the Income Tax Assessment Act 1936 (ITAA 1936) or the SISA. However, the phrase provident, benefit and superannuation fund established for the benefit of employees was considered by Justice Kitto of the High Court in Mahony v. Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony).

Justice Kitto referred to each of the three terms separately and said:

Since a fund, if its income was to be exempt under the provision, was separately required to be one established for the benefit of employees, each of the three descriptive words provident, benefit and superannuation must be taken to have connoted a purpose narrower than the purpose of conferring benefits in a completely general sense, upon employees. All that need to be recognised is that just as provident and superannuation both referred to the provision of a particular kind of benefit so benefit must have meant a benefit, not in the general sense, but characterised by some specific future purpose.

Justice Kitto in Mahony referred to superannuation as the making of provision for financial support for an employee, or for the employee's estate or dependants, to arise on the employee's retirement, death or other cessation of employment (for example, termination or resignation).

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

The view that a superannuation fund should be established for the sole purpose of providing superannuation benefits on retirement is also supported in the High Court decision Scott, Associated Provident Funds Ltd & Belvidere Investments Pty Ltd v. Federal Commissioner of Taxation (No 2) (1966) 10 AITR 290; (1966) 14 ATD 333; 40 ALJR 265 (Scott). Justice Windeyer said:

... 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.

The Commissioner of Taxation's view is that a fund, to be classified as a superannuation fund, must exclusively provide a narrow range of benefits that are characterised by some specific future purpose, that is, the payment of superannuation benefits upon retirement or death of the individual or as specified under the SISA.

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

(i)    on or after retirement from gainful employment; or

(ii)   attaining a prescribed age; and

(iii)  on the members death. (This may require the benefits being passed on to a members dependants or legal representative.)

Provided a regulated superannuation fund is maintained for one or more of the core purposes, section 62 of the SISA also allows a superannuation fund to provide benefits for 'ancillary purposes'. 'Ancillary purposes' cover benefits paid on the termination of employment in the event of ill-health and benefits for dependants following the death of a member after retirement or attaining the prescribed age. As indicated, 'ancillary purposes' does not relate to general or non-retirement purposes such as education, home purchases, medical expenses et cetera.

It is noted that the client's pension consists of two pillars, the first being a social security pension and the second being the occupational pension and insurance scheme. The social security pension is a compulsory insurance for all persons who live and work in Country A. The purpose of the social security pension is to protect surviving dependants against financial hardship in the event of a death of a spouse or parent. The deceased is required to contribute for at least on full year with the overall objective of supporting themselves in retirement.

The Country A government pension fund is the occupational pension and insurance scheme of which it was compulsory for the client to contribute towards as an employee of the Country A government. The public servant pension verifies the right to the benefit for dependents upon death of the account holder as long as certain conditions are met. Beneficiaries must provide proof of their entitlement to the pension.

From the above it can be seen the social security pension and the public service pension are used for retirement purposes and it is considered that entitlements in the social security pension are set aside for purposes of the kind outlined in section 62 of the SISA. Accordingly, both the social security pension and public service pension fall within the definition of a foreign superannuation fund and subsection 305-70(2) of the ITAA 1997 will have application in this instance.

Assessable income

The assessable income of a foreign resident includes ordinary income and statutory income derived directly or indirectly from all Australian sources during the income year (sections 6-5 and 6-10 of the ITAA 1997).

Subsection 6-5(2) 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 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 Australia and Country A For The Avoidance Of Double Taxation With Respect To Taxes On Income (Australia and Country A DTA) is listed in section 5 of the Agreements Act.

Article 18 of the Australia and Country A DTA considers pensions and states:

1.    Subject to the provisions of paragraph 2 of Article 19, pensions, social security payments and annuities paid to a resident of a Contracting State shall be taxable only in that State. However, where such income arises in the other Contracting State and the recipient is not liable to tax in the first-mentioned State in respect of that income, the income may be taxed in that other Contracting State.

Article 19(2) of the Switzerland agreement further states:

2.    (a). Pensions and other similar remuneration paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority there of to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.

Foreign Income Tax Offset (FITO)

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income.

The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset.

To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year.

Section 770-15 of the ITAA 1997 defines foreign income tax to include a tax on income that is imposed by a law other than an Australian law. A note to section 770-15 of the ITAA 1997 states that foreign income tax includes only that which has been correctly imposed under the foreign law.

Question 1

Publica pension

Yes. As the public service pension is a federal government pension for your employment with the Federal Institute, this would mean Article 19(2) of the Australia and Country A DTA would apply. This would limit the taxation of the public service pension income to Country A only as per the article.

Therefore, the Country A Government pension, you receive would not be assessable in Australia under section 6-5 of the ITAA 1997.

Question 2

N/A

Question 3

N/A

Question 4

Social Security pension

Yes. Article 18(1) of the Australia and Country A DTA provides that pensions, social security payments and annuities of the type indicated by the social security pension would be taxed in Country A unless the client becomes a resident of Australia. Based on the position you are considered an Australian resident for tax purposes; the country A pension will be taxable in Australia so long as it is not also taxable in Country A.

The Country A pension you receive would be assessable in Australia under section 6-5 of the ITAA 1997 on the above basis.

Question 5

Yes. Residents of Australia are required to declare and pay tax on their world-wide income including assessable foreign pensions such as the social security pension mentioned. Foreign pensions are assessable under section 6-5 of the ITAA 1997, such as the social security pension would be assessable based on Australian resident tax rates.

Question 6

Yes, on the assumption tax has been paid in Country A in respect of the income, you will be entitled to a Foreign Income Tax Offset.

Question 7

Yes. Section 161 of the ITAA 1936 states that every person must, if required by the Commissioner by notice published in the Gazette, give to the Commissioner a return for a year of income within the period specified in the notice.

The Country A foreign pension income forms part of your world-wide assessable income will need to be declared when lodging. If your total assessable income, including your foreign pension exceeds the tax-free threshold for the year concerned (currently $18,200) you are generally required to lodge a return. In addition, any assessable income from which tax is withheld will also constitute a requirement to lodge of a return.