Issue
Is the taxpayer's Eligible Termination Payment (ETP) from a complying Australian Superannuation Fund assessable under section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) when the taxpayer is a resident of the United States of America (USA) for the purposes of Australia's tax treaty with the USA?
Decision
Yes. That component of the taxpayer's ETP from a complying Australian Superannuation Fund as is assessable under sections 27A to 27H of the Income Tax Assessment Act 1936 (ITAA 1936) will be assessable income under section 6-10 of the ITAA 1997. Australia's tax treaty with the USA does not affect this result.
Facts
Upon retirement the taxpayer received a lump sum ETP from a complying Australian Superannuation Fund.
At the time of receipt of the ETP the taxpayer was a resident of the USA for tax treaty purposes and a non resident of Australia.
Reasons for Decision
Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of a non resident includes statutory income from Australian sources (subsection 6-10(5) of the ITAA 1997).
Subsection 6-10(2) of the ITAA 1997 defines statutory income by referring to amounts included in assessable income by provisions about assessable income and section 10-5 of the ITAA 1997 lists those provisions about assessable income.
Included in this list are eligible termination payments dealt with under sections 27A to 27H of the ITAA 1936.
The amount of the ETP included in assessable income under sections 27A to 27H of the ITAA 1936 is therefore statutory income for the purposes of section 6-10 of the ITAA 1997. As the complying superannuation fund that paid the ETP is established and controlled in Australia, the source of the payment is Australia.
In determining liability to tax on Australian source income received by a non resident, 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 ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (apart from Australia's general anti-avoidance rules and certain provisions dealing with limitations of tax credits).
Schedule 2 to the Agreements Act contains the double tax convention between Australia and the USA (the US Convention). The US Convention operates to avoid the double taxation of income received by Australian and USA residents.
Article 15 of the US Convention deals with dependant personal services and provides that salaries, wages and other similar remuneration derived by a resident of the USA in respect of an employment or in respect of services as a director of a company shall be taxable only in the USA. If however the employment or services are performed in Australia such remuneration may, subject to certain conditions, also be taxed in Australia.
An ETP, being a capital amount paid from a complying superannuation fund upon retirement is not considered to be 'salary, wages' or 'other similar remuneration' and therefore does not come within the scope of Article 15 of the US Convention.
Article 18 of the US Convention deals with pensions and annuities. Paragraph (1) of Article 18 of the US Convention provides that pensions and other similar remuneration paid to an individual who is a resident of the USA in consideration of past employment shall be taxable only in the USA. Paragraph (4) of Article 18 of the US Convention defines 'pensions and other similar remuneration' to mean periodic payments made by reason of retirement or death, in consideration for services rendered, or as compensation paid after retirement for injuries received in connection with past employment.
An ETP is not a periodic payment and is therefore not within the scope of Article 18 of the US Convention.
Article 21 of the US Convention deals with other income that is not covered by any specific income Articles.
An ETP paid by a complying Superannuation Fund is not dealt with under any specific income Articles in the US Convention and is therefore within the scope of Article 21.
Paragraph 2 of Article 21 of the US Convention which applied to the income for the year ended 20 June 2002 states that items of income of a resident of a Contracting State not dealt with in the foregoing Articles of the Convention from sources in the other Contracting State may also be taxed in the State in which it has its source.
As a result, the US Convention preserves Australia's taxing right on the ETP because it is from an Australian source.
Therefore that component of the ETP received by the taxpayer as is assessable under sections 27A to 27H of the ITAA 1936 is statutory income from an Australian source and is therefore part of their assessable income under section 6-10 of the ITAA 1997.