Assessability of German retirement pension received by an Australian resident

Is a German retirement pension paid to an Australian resident taxpayer assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A German retirement pension paid to an Australian resident taxpayer is assessable under subsection 6-5(2) of the ITAA 1997 as it is ordinary income.

The taxpayer is a resident of Australia.

The taxpayer receives a retirement pension from the German government.

The pension is not a form of compensation for National Socialist (Nazi) persecution.

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 during the income year.

Pensions and annuities are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign source income, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 9 to the Agreements Act contains the double tax agreement between Australia and the Federal Republic of Germany (the German Agreement). The German Agreement operates to avoid the double taxation of income received by Australian and German residents.

Article 18 of the German Agreement provides that pensions and annuities paid to residents of Australia are taxable only in Australia.

Paragraph 23(kc) and subparagraph 23(kca)(i) of the Income Tax Assessment Act 1936 (ITAA 1936) exempt from income tax any pensions or annuities that are paid as or by way of compensation by the Federal Republic of Germany relating to compensation for National Socialist persecution.

The taxpayer's German retirement pension was not paid in respect of National Socialist persecution and therefore is not exempt from tax under paragraph 23(kc) or subparagraph 23(kca)(i) of the ITAA 1936. As the taxpayer is an Australian resident for tax purposes, subsection 6-5(2) of the ITAA 1997 will include income from all sources, including the German retirement pension, in the assessable income of the taxpayer.