ATO Interpretative Decision
ATO ID 2008/135
Income Tax
Foreign income tax offset: New Zealand National Provident Fund pensionFOI status: may be released
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This ATO ID has been amended by replacing the references to paragraph (2) of Article 24 and paragraph (1) of Article 19 to the tax treaty between Australian and New Zealand with paragraph (1) of Article 23 and paragraph (1) of Article 18 contained in the new tax treaty which took effect from 19 March 2010.
This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Is the taxpayer entitled to a foreign income tax offset under subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of a pension received from a New Zealand (NZ) National Provident Fund (the Fund)?
Decision
No. The taxpayer is not entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997 in relation to the pension received from the Fund because the taxpayer has not paid foreign income tax.
Facts
The taxpayer is an Australian resident for taxation purposes.
The taxpayer receives a pension from the Fund after 1 July 2008.
The pension received is non-assessable in NZ.
The Fund is taxed on its investment earnings in NZ.
The pension is assessable in Australia under section 6-5 of the ITAA 1997.
Reasons for Decision
Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset for foreign income tax the taxpayer paid on an amount included in assessable income.
Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' as tax imposed by a law other than an Australian law, and is:
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- tax on income; or
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- tax on profits or gains, whether of an income or capital nature; or
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- any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953 (the Agreements Act).
Subsections 770-130(1) and 770-130(2) of the ITAA 1997 provide that a taxpayer is still treated as having paid foreign income tax where the foreign income tax is paid by someone else under an arrangement or under the law relating to the foreign income tax.
For these subsections to apply there must be a nexus between the payment of the foreign income tax and the tax liability of the taxpayer.
In this case, the Fund is liable to tax in its own right. As the foreign income tax paid by the Fund does not relate to a tax liability of the taxpayer, the taxpayer is not entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997.
Paragraph 1.105 of the Explanatory Memorandum to the Tax Laws Amendment (2007 Measures No. 4) Act 2007, which introduced the foreign income tax offset rules, states:
A taxpayer in receipt of a foreign pension from a foreign superannuation fund will also not satisfy the nexus in respect of any foreign income tax paid by the foreign superannuation fund on its income.
In determining liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that the ITAA 1997 is read as one with the Agreements Act. Schedule 4 to the Agreements Act contains the double tax agreement between Australia and NZ (the NZ Convention).
Article 23(1) of the NZ Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in NZ under NZ law and in accordance with the NZ Agreement will be allowed against Australian tax payable on income from NZ sources. No NZ tax has been paid by the taxpayer under the law of NZ.
Article 18(1) of the NZ Convention provides that pensions paid to a resident of Australia shall be taxable only in Australia. The fact that the Fund is liable to tax in NZ on its income does not affect the application of Article 18(1). Hence, the pension received by the taxpayer from the Fund is taxable only in Australia. Even if it were recognised that the taxpayer had paid tax in NZ in respect of the pension received, such tax would not have been paid in accordance with the NZ Convention.
Therefore, Article 23(1) of the NZ Convention does not apply to oblige Australia to provide credit relief in respect of the pension received by the taxpayer.
Year of income: Year ended 30 June 2009
Legislative References:
Income Tax Assessment Act 1997
section 6-5
subsection 770-10(1)
subsection 770-15(1)
subsection 770-130(1)
subsection 770-130(2)
section 4
schedule 4
schedule 4, Article 18(1)
schedule 4, Article 23(1)
Other References:
Explanatory Memorandum to Tax Laws Amendment (2007 Measures No. 4) Act 2007
Keywords
Double tax agreements
Foreign pension
Foreign income tax offsets
International law
International tax
New Zealand
Treaties
ISSN: 1445-2782