Edited version of private advice

Authorisation Number: 1052324267141

Date of advice: 27 November 2024

Ruling

Subject: Foreign pension - overseas defence force

Question

Is the foreign pension you receive exempt from Australian income tax?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You arrived in Australia on XX XX 19XX.

You are an Australian resident and reside in Australia permanently.

You do not have Country A citizenship.

Your main residence is in Australia.

You have been given a pension in Country A after your spouse's passing in XX 20XX.

Your spouse was exempt from paying income tax in Country A.

A certificate from your spouse's bank account shows their income tax exemption status.

You lodge income tax returns in Country A on a regular basis.

You have finalised your income tax return in Country A for the financial year ended XX XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 subsection 160AAAA(1)

International Tax Agreements Act 1953

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

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.

The International Tax Agreements Act 1953 (Agreements Act), section 4 incorporates the Agreements Act, the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three provisions of the tax acts 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 an agreement listed in this section has the force of law according to its tenor. The agreement operates to avoid the double taxation of income received by residents of Australia and the current agreements which includes Country A.

The Convention between the government of Australia and the government of Country A for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (the Country A Agreement) deals with the elimination of double taxation.

Article 18, of the Country A Agreement refers to the basis of taxation for pensions and annuities. Under this article, pensions (not including pensions referred to in Article 19) and annuities paid to a resident of Australia is taxable only in Australia.

Article 19, explains government services and pensions paid from the Country A government, for services performed by an employee of the Country A government in discharging government functions of Country A, to an individual who is an Australian citizen and resident of Australia, is taxable only in Australia.

While Article 19 would have applied to your husband as they rendered the services, Article 18 applies in this instance as you are not the person who rendered the services covered by the Article 19.

Application to your circumstances

With understanding the Country A pension, you receive is not taxed in Country A. You are an Australian citizen and resident for tax purposes. Therefore, in accordance with the Country A agreement and the Australian tax laws this payment is taxable in Australia.

You will be required to include this amount in your assessable income under subsection 6-5 (2) of the ITAA 1997.

Further issues to consider

Seniors and pensioners tax offset (SAPTO)

Subsection 160AAAA(1) of the ITAA 1936 provides that a taxpayer who is an individual (other than in the capacity as trustee) is entitled to a rebate of tax in the taxpayer's assessment in respect of income of a year of income of an amount (if any), ascertained in accordance with the regulations.

You may be eligible to claim the seniors and pensioners tax offset (SAPTO) if you meet all the required conditions. If eligible, this will help offset some or all of any tax payable that may result from including all your world-wide assessable income in your Australian tax return.