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Is a Malaysian Government service pension derived by an Australian resident taxpayer assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The Malaysian Government service pension is assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is a surviving spouse of the original recipient of the Malaysian Civil Service Pension. This is a pension paid by the Malaysian Government in respect of services rendered by the taxpayer's spouse to that government (that is, Government service pension).

The type of pension received by the taxpayer is not the type of pension that falls within the definition of section 27H of the Income Tax Assessment Act 1936 .

Upon the death of the spouse, the taxpayer became entitled to and is paid the pension.

The services rendered by the spouse were not in connection with a trade or business carried on by the Government of Malaysia.

The Malaysian Government service pension has been taxed in Malaysia.

Subsection 6-5(2) of the 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.

In the present case, the Malaysian Civil Service Pension is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income received by an Australian resident, it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Taxation Agreements Act 1953 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one.

Schedule 16 of the Agreements Act contains the tax treaty between Australia and Malaysia (the Malaysian Agreement). Schedule 16A and Schedule 16B of the Agreements Act contain the Protocol and Second Protocol to the Malaysian Agreement respectively (the Protocols). The Malaysian Agreement and Protocols operate to avoid the double taxation of income received by Australian and Malaysian residents.

The relevant article in the Malaysian Agreement is Article 18 which covers Government service. Article 17 of the Malaysian Agreement, which covers Pensions and annuities, is not applicable since it specifically excludes pensions referred to in Article 18, that is, Government service pensions.

Article 18(2) provides that a pension paid for services rendered to the Malaysian Government shall be taxable in Malaysia.

There is nothing under Article 18 or any other provision of the Malaysian Agreement that precludes Australia from also taxing the Government service pension, in accordance with its domestic law, where it is derived by an Australian resident. The absence of the word 'only' after 'shall be taxable' in Article 18(2) is significant and can be contrasted with Article 17(1) which includes the word 'only'. In Chong v. FC of T (2000) 44 ATR 295; 2000 ATC 4315, Goldberg J said at ATR 307; ATC 4326: ... on the proper construction of Article 18(2), a Government service pension paid by Malaysia is taxable in Australia. Article 18(2) does not provide that Malaysia alone is to have the power to tax government pensions; nor does it restrict or limit Australia from so doing.

As the taxpayer is an Australian resident for taxation purposes, the pension income derived from Malaysia will be assessable income under subsection 6-5(2) of the ITAA 1997.

Under Article 22 of the Malaysian Agreement, Government service pensions are deemed to be income from sources in Malaysia. Accordingly, where Malaysia exercises its right under Article 18(2) to tax the Malaysian Civil Service Pension, Article 23(3)(a) operates to require the Malaysian tax paid to be allowed as a credit against Australian tax payable in respect of that income. As Malaysian tax has been paid by the taxpayer in respect of the pension that will also be subject to tax by the taxpayer in Australia, the taxpayer will be entitled to a foreign income tax offset under Division 770 of the ITAA 1997. Note 1 : by virtue of Article 18(3) of the Malaysian Agreement, a different rule applies where the Government service pensions are paid in respect of services rendered in connection with any trade or business carried on by the Malaysian Government or a political sub-division or a local authority thereof, for example the Central Bank of Malaysia (Bank Negara). In such cases, the general pension article, Article 17(1), prevails to require the Malaysian Government service pension to be taxed only in Australia. Note 2 : this ATO ID also applies to Government service pensions derived by an Australian resident taxpayer from the Malaysian Government in respect of services rendered by the taxpayer themselves to that government.