Private ruling: Assessability of a foreign pension
Published: April 2014
Ruling period: 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Question & answer | Is the War Disability Pension received from a foreign country assessable in Australia? | No.

Relevant facts and circumstances: You are a naturalised Australian citizen and an Australian resident for tax purposes. You receive a war disability pension from a foreign country. According to a letter from the Consulate General of the foreign country dated XXXX this pension is equivalent to an exempt Australian pension and should not be subject to tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 6-15(2) | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Schedule X | International Tax Agreements Act 1953 SchX-ArtX | Income Tax Assessment Act 1997 Section 11-15 | Income Tax Assessment Act 1997 Section 53-10 | Income Tax Assessment Act 1997 Section 52-65

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 ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Pensions are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Subsection 6-15(2) of the ITAA 1997 provides that any income that is exempt income will not be included as assessable income. Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 53-10 of the ITAA 1997 which deals with wounds and disability pensions. Item 5 of the table in section 53-10 of the ITAA 1997 provides that wounds and disability pensions are wholly exempt provided that the payment is: a) of a kind specified in subsection 315(2) of the Income and Corporation Taxes Act 1988 (ICTA) of the United Kingdom, and b) similar in nature to payments that are exempt under Divisions 52 or 53 of the ITAA 1997. Subsection 315(2) of the ICTA of the United Kingdom provides that income from wounds and disability pensions are exempt from income tax if they are: a) wounds pensions granted to members of the naval, military or air forces of the Crown, or b) disablement or disability pensions granted to members, other than commissioned officers, of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air-force service. Section 53-10 of the ITAA 1997 has equivalent wording to the repealed paragraph 23AD(3)(c) of the Income Tax Assessment Act 1936 (ITAA 1936). The application of paragraph 23AD(3)(c) of the ITAA 1936 is considered in Taxation Ruling IT 2586 'Wounds and disability pensions paid by foreign government: whether exempt' (IT 2586). IT 2586, at paragraphs 4 and 5, states that the exemption provided in paragraph 23AD(3)(c) of the ITAA 1936 applies to any such pensions payable by any government and the exemption applies irrespective of the age of the pensioner. In determining liability to Australian tax on foreign sourced income, it is relevant to consider not only the 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 ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Schedule X to the Agreements Act contains the double tax agreement between Australia and the foreign country. The Convention operates to avoid the double taxation of income received by Australian and residents of the foreign country. Article X of the Convention provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia, that is, Australia has sole taxing rights. You are in receipt of a war disability pension. The payment is of a kind specified in subsection 315(2) of the ICTA of the United Kingdom. Therefore, the payment meets the first requirement for exemption under section 53-10 of the ITAA 1997. Section 52-65 of Division 52 of the ITAA 1997 provides that a pension paid for war-caused death or incapacity will be exempt. The war disability pension paid is similar in nature to other payments that are exempt under Divisions 52 or 53 of the ITAA 1997. Therefore, the payment meets the second requirement for exemption under section 53-10 of the ITAA 1997. As both of the requirements have been met for the exemption to apply, the war disability pension is considered to be exempt income. As the payment is exempt, it is not assessable under section 6-5(2) of the ITAA 1997.