Private ruling: Foreign pension contributions
Date of advice: 24 November 2022
Published: 23 January 2023
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX | Year ended 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Should you include as assessable income the amounts deducted from your foreign gross employment income that are your compulsory Country X pension contributions? | A1: Yes. | Q2: Are the Category A and Category B contributions to your Country X retirement fund deductable under section 8-1 of the Income Tax assessment Act 1997 (ITAA 1997)? | A2: No.

Relevant facts and circumstances: You are an Australian resident for tax purposes. You were employed in Country X during the 20XX-20XX income years. You were required to make compulsory contributions towards the Country X pension system. The Country X old-age pension system consists of three categories. Category A contributions are intended to cover basic needs in retirement. Category B contributions refer to the occupational pension and is calculated on the basis of the contributions you made during your working life and according to the regulations of the pension fund you paid into. Category A and Category B contributions were deducted from your gross salary.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 (2) | Income Tax Assessment Act 1997 Section 6-5 (4) | Income Tax Assessment Act 1997 Section 8-1

Reasons for decision: Summary: Subsection 6-5(2) of the ITAA 1997 provides that Australian residents are assessable on ordinary income derived directly or indirectly from all sources, whether in or out of Australia. Salary and wages are ordinary income under subsection 6-5(2) of the ITAA 1997. As an Australian resident your worldwide income is assessable in Australia under section 6-5(2) of the ITAA 1997. Subsection 6-5(4) of the ITAA 1997 provides that you have derived an amount of ordinary income when you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. The constructive receipt rule in subsection 6-5(4) of the ITAA 1997 is designed to ensure that if an amount is applied or dealt with in any way on an individual's behalf or at an individual's direction, the individual is taken to have received the amount. This provision ensures that money paid to an individual's account (at the individual's direction or on the individual's behalf) is treated as received by the individual and therefore as ordinary income if the money is a reward for employment. In this case, although amounts deducted from your gross salary are compulsory, they are paid to a superannuation account in your name for your benefits. Also, contributions made to the pension fund are kept for your aged pension and are payable to you when you retire from work. Since they are paid from your gross earnings to funds and accounts on your behalf and kept for your benefit, you are constructively deemed to have derived these amounts as part of your assessable income under subsection 6-5(4) of the ITAA 1997. Section 8-1 of the ITAA 1997 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income, except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income. In determining whether a deduction for expenses for the Category A and Category B contributions for your Country X pension is allowable, the nature or character of the expenditure must be considered, that is, whether the expenses are incurred for a capital or a revenue purpose. The nature or character of the expenses follows the advantage that is sought to be gained by incurring the expenses. For example, if the advantage to be gained is of a capital nature, then the expenses incurred in gaining the advantage will also be of a capital nature and are not deductible. In general terms, a deduction is allowed where the expenditure is necessary and has been incurred to enable or assist a taxpayer in their current income producing activities. The Category A and Category B contributions to your Country X pension are to cover your basic needs in retirement. These contributions are not incurred as an expense that facilitates your ability to carry out your employment. The expenses are too general in that the nature of your income producing activities does not affect your liability to make the contributions. Further, the fact that the payments are compulsory does not make them deductible. There is an insufficient connection between the Category A and Category B contributions and your future Country X retirement pensions and current income-earning activities. Therefore, you are not entitled to claim a deduction for these contributions.