Edited version of private advice

Authorisation Number: 1052214696956

Date of advice: 6 February 2024

Ruling

Subject: Foreign pension

Question 1

Is a pension paid by an institution of the EU received by a resident taxpayer assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Question 2

Are you entitled to a foreign income tax offset for tax withheld on the pension?

Answer

Yes.

Question 3

Are you entitled to an undeducted purchase price (UPP) deductible amount in respect of your pension?

Answer

No. You are not entitled to a UPP as you did not make any personal (after tax) contributions towards the pension.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a former employee of an institution of the EU.

You are in receipt of a retirement pension paid by the institution. You were granted this pension due to past employment.

You intend on becoming an Australian tax resident.

You have not made any personal after tax contributions towards the pension.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 770-10

Income Tax Assessment Act 1997 section 770-15

Income Tax Assessment Act 1936 section 27H

Reasons for decision

Question 1

Is a pension paid by an institution of the EU received by a resident taxpayer assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Summary

Yes. A pension paid by an institution of the EU received by a resident taxpayer is assessable under subsection 6-5(2) of the ITAA 1997.

Detailed reasoning

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.

A pension received in respect of previous employment is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953.

Australia has entered into double taxation agreements with a number of the member countries of the European Union (EU). However, Australia does not have a double taxation agreement with the EU.

Accordingly, as the taxpayer is a resident of Australia, the pension received by the taxpayer in respect of former employment with an institution of the EU is assessable under subsection 6-5(2) of the ITAA 1997.

Question 2

Are you entitled to a foreign income tax offset for tax withheld on the pension?

Summary

Yes. If you pay foreign tax on the pension you are entitled to a foreign income tax offset.

Detailed reasoning

Under section 770-10 and section 770-15 of the ITAA 1997, you are entitled to a foreign income tax offset for an income year for foreign income tax if:

a.The tax is imposed by a law other than an Australian law. The foreign law may be at the level of a national or supra-national government such as the European Union, or at a state, provincial, local or municipal level. It is not necessary that the foreign tax be imposed by a foreign country, and;

b.The tax is on income, profits, gains or any other tax covered by a double tax agreement.

The European Union is a treaty-based framework that defines and manages economic and political co-operation among its member countries through its various institutions.

Any foreign tax you pay as resident taxpayer in respect of pension income received is considered to be imposed by a supranational government and accordingly you will be entitled to a foreign income tax offset.

Question 3

Are you entitled to an undeducted purchase price (UPP) deductible amount in respect of your pension?

Summary

No. You are not entitled to a UPP as you did not make any personal (after tax) contributions to the pension.

Detailed reasoning

Section 27H(1) of the Income Tax Assessment Act 1936 provides that the assessable income of a taxpayer includes the amount of any annuity derived excluding a deductible amount in relation to that annuity. If a taxpayer has income from a foreign pension or annuity, they may be entitled to claim a deduction to reduce the taxable amount if their pension or annuity has an undeducted purchase price (UPP).

The UPP is the amount the taxpayer contributed towards the purchase price of their pension or annuity (i.e. their personal contributions). You have advised that you did not many any personal after tax contributions towards the pension, therefore you are not entitled to an UPP.