Private ruling: Foreign pensions
Date of advice: 15 March 2019
Published: May 2019
Ruling period: Period ending 30 June 2018 | Period ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Is the pension paid by the foreign state pension fund assessable in Australia? | A1: Yes | Q2: Is the pension paid by the foreign council staff pension fund assessable in Australia? | A2: Yes | Q3: Are you entitled to a foreign income tax offset for the foreign tax withheld on the foreign council staff pension? | A3: No

Relevant facts and circumstances: You were born in Country X and now reside in Australia. You hold dual citizenship of Australia and Country X. You formerly worked for a local city council in Country X. You receive a pension from a state pension fund in Country X and this payment is not taxed in Country X. You receive another pension from the local city council staff pension fund in Country X and this payment is taxed at source in Country X. You have made a request of the Country X tax authorities for the refund of tax paid on the council staff pension. The response obtained states that you are not entitled to a refund of the tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 770-10(1) | Income Tax Assessment Act 1997 section 770-15 | International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes the ordinary income derived from all sources, whether in or out of Australia, during the income year. A pension is ordinary income and therefore assessable for the purposes of 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 agreement contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the 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). The Convention between Australia and Country X (the Country X Convention) operates to avoid the double taxation of Australian and Country X residents. | Detailed Reasoning - Pension received from state pension fund: Article 18 of the Country X Convention states that pensions (excluding those related to Government Service) will only be taxed in the country of residence of the recipient. The country from which the pension is paid can only tax the pension should it not be liable to tax in the country in which the recipient is a resident. Therefore, a pension (unrelated to Government Service) paid to an Australian resident from a Country X source will only be taxable in Australia under the Convention as pension income is taxable in Australia under subsection 6-5(2) of the ITAA 1997. Consequently, the Country X state pension you receive is taxed only in Australia under Article 18 of the Country X Convention and is assessable in Australia under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Pension received from council staff pension fund: Article 19 of the Country X Convention deals with Government Service and provides that pensions paid by, or out of funds created by, one of the countries or a political subdivision or a local authority thereof to an individual (who is a citizen of the paying country) in respect of services rendered to that country or subdivision or authority will be taxable only in that State, that is, the source country. The country of residence of the recipient has no right to tax the pension in these circumstances. However, the Article specifies that the provisions of Article 18 will apply to pension income instead of Article 19 where the pension is paid in respect of services rendered in connection with a ‘business carried on’ by one of the countries or a political subdivision or a local authority thereof. Paragraphs 54 and 55 of Taxation Ruling TR 2005/8 Income tax: the meaning of particular terms in the Government Service Articles of Australia’s tax treaties explain that although Article 19 relates to the taxation of remuneration paid to individuals in respect of services rendered in the discharge of ‘governmental functions’, remuneration paid to individuals in respect of services rendered in connection with any ‘trade or business’ carried on by one of the countries, is ‘carved out’ of the Article. The trade or business exception applies on the basis that trading and carrying on business would not be core or inalienable functions of government. In such cases, other Articles of the tax treaty apply to the remuneration. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia’s Double Tax Agreements states that the OECD Model Tax Convention and Commentary (OECD Commentary) provides appropriate guidance when interpreting the terms used in double tax agreements. In relation to the Government Service article, the OECD commentary (2017 version) states at paragraph 6 that Article 19 will not apply where a pension is derived from services performed for a public body that performs business activities. In such cases, Article 18 will apply to the pension instead. Paragraph 6 provides examples of business activities as being ‘State Railways, the Post Office, State-owned theatres etc.’ In your case, the other pension you receive relates to your former employment for a city council in Country X. Consequently, this pension is paid in respect of a business carried on by the government of Country X or ‘a political subdivision or a local authority thereof’ and your pension is taxed under Article 18 instead of Article 19. Therefore, the Country X Convention provides that your pension from the council staff pension fund should only be taxed in Australia with Country X having no right to tax the pension. The council staff pension you receive is assessable in Australia under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Foreign Income Tax Offset: Subsection 770-10(1) of the ITAA 1997 provides for a foreign income tax offset for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income. 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 points out that 'foreign income tax' includes only that which has been correctly imposed under the foreign law, and where the foreign jurisdiction has a tax treaty with Australia under the Agreements Act, foreign income tax includes only tax which has been correctly imposed under the treaty. The Country X Convention confirms that a tax credit is only allowed against Australian tax for Country X tax paid if the Country X tax is paid in accordance with the Convention. In your case, you have had Country X tax withheld from the pension you received from the council staff pension fund. However, we consider that the Convention does not allow Country X to tax the pension and it should only be taxed in Australia. Therefore, the Country X tax paid on the council staff pension was not paid in accordance with the Country X Convention and a foreign income tax offset is not allowable in Australia for the tax paid. | Detailed Reasoning - Mutual agreement procedure: The Country X Convention states that where a person considers that the actions of one or both of the countries party to the Convention results in that person not being taxed in accordance with the provisions of the Convention, the person may, irrespective of the remedies provided by the domestic law of the countries, present a case to the ‘Competent Authority’ of the country of which the person is a resident. The case must be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Convention. In Australia, these requests need to be submitted to the Australian Competent Authority which forms part of the functions of the Australian Taxation Office. Full details of what to include in an application, along with the address to send it to, can be found on the ATO website by searching for Mutual agreement procedure or by typing code QC 56904 in the search box.