Foreign tax credits : tax paid to the European Union by a resident taxpayer in receipt of assessable foreign pension

Is the taxpayer, a resident of Australia for income tax purposes, entitled to a foreign tax credit under subsection 160AF(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for tax paid to the European Union (EU) on assessable pension income received from an institution of the EU?

No. A resident taxpayer is not entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936 for tax paid to the EU on pension income received from an institution of the EU.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer is a former employee of an institution of the EU.

The taxpayer receives a pension in respect of their previous employment with the institution.

The pension is paid from a foreign source.

The pension is assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer has paid tax to the EU in respect of the pension income.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident taxpayer contains foreign income and foreign tax has been paid on that income, a foreign tax credit will be allowed. The foreign tax credit allowed against Australian income tax is the lesser of: • the amount of that foreign tax paid, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or • the amount of Australian tax payable in respect of the foreign income.

Subsection 6AB(2) of the ITAA 1936 defines 'foreign tax' to include tax imposed on income by a law of a foreign country.

Paragraph 22(1)(f) of the Acts Interpretation Act 1901 states that 'foreign country' means any country (whether or not an independent sovereign state) outside Australia.

'Country' is defined in the Macquarie Dictionary (2nd Edition) 1987, as: 1. a tract of land considered apart from geographical or political limits; region; district. 2. any considerable territory demarcated by geographical conditions or by a distinctive population. 3. the territory of a nation. 4. a state.

The EU is not a foreign country. The EU is a treaty-based framework that defines and manages economic and political co-operation among its member countries through its various institutions.

The EU imposes a tax on the salary, wages and emoluments paid to its officials and pensions paid to former officials.

The EU tax paid by the taxpayer in respect of pension income received from an institution of the EU is not a foreign tax under subsection 6AB(2) of the ITAA 1936 as it is not tax imposed by a law of a foreign country. Accordingly, the taxpayer is not entitled to a foreign tax credit under subsection 160AF(1) of the ITAA 1936.