Issue
Is pension income paid to a resident taxpayer's ex-spouse in respect of an entitlement that has been legally transferred to the ex-spouse under German family law, assessable income of the taxpayer under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The pension income paid to a resident taxpayer's ex-spouse in respect of an entitlement that has been legally transferred to the ex-spouse under German family law is not assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1997. Only the amount that the taxpayer receives in respect of their remaining entitlement is assessable under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is a German citizen and a resident of Australia for income tax purposes.
The taxpayer receives pension income from a superannuation fund in respect of previous employment in Germany.
The taxpayer divorced their spouse under German law.
As part of the divorce proceedings, the taxpayer's pension entitlement was divided and a portion thereof transferred to the ex-spouse.
The transfer was ordered by a German Court pursuant to section 1587 of the German Civil Code ( Burgerliches Gesetzbuch ). This provision, which is part of a number of provisions about divorce, deals with the equalisation of accrued gains between spouses in divorce proceedings.
Under the transfer, the ex-spouse obtained a separate entitlement to a pension from the superannuation fund.
The superannuation fund has created a separate account in the name of the ex-spouse from which the ex-spouse now receives a pension in proportion with the entitlement transferred.
The transfer of the entitlement to the ex-spouse is irrevocable by the taxpayer.
If the ex-spouse dies before the taxpayer, the entitlement transferred reverts to the taxpayer.
If the taxpayer dies before the ex-spouse, the entitlement transferred does not expire and may be enforced against the heir/s of the taxpayer.
The taxpayer has no further rights in respect to the entitlement transferred to the ex-spouse or to the pension income derived from that entitlement.
The payments made to the ex-spouse are not maintenance payments for German law purposes.
The ex-spouse is subject to German tax on the amount of pension income received.
Reasons for Decision
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.
Subsection 6-5(4) provides that in working out whether you derived an amount of ordinary income and if so, when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
The taxpayer receives pension income from a German superannuation fund.
A presently existing right to income, including a pension, is a chose-in-action (that is, an intangible right enforceable by legal or equitable action) which is capable of assignment.
The taxpayer's legal entitlement to the pension income from the superannuation fund has changed as a result of the transfer of part of the entitlement to the taxpayer's ex-spouse in accordance with German family law. The taxpayer has no further rights in respect of the entitlement transferred - the entitlement will only revert to the taxpayer upon the ex-spouse's death while the ex-spouse's entitlement is unaffected should the taxpayer die. The transfer of the entitlement to the ex-spouse is recognised and permitted by the superannuation fund and is accordance with German law.
The transfer of the entitlement to the ex-spouse is a valid assignment for general law purposes. The pension income that relates to the entitlement transferred to the ex-spouse can no longer be said to have been derived by the taxpayer as the taxpayer has no legal entitlement to receive that pension income.
However, a valid assignment under general law may not be effective for tax purposes.
Section 102B of the ITAA 1936 applies where a right to receive income from property is transferred, otherwise than by a will or codicil, by a person to an associate for a period that will or may terminate (other than by death of any person or legal disability of the transferee) before the prescribed date. The prescribed date is defined in subsection 102A(1) of the ITAA 1936 to be the day before the expiration of 7 years from the time the income was first paid to the transferee. In such cases, the income derived by the property is treated as if the transfer had not been made and remains the income of the transferor.
In this case, the transfer may not terminate before the prescribed date unless the ex-spouse dies.
As the transfer may not terminate before the prescribed date, section 102B of the ITAA 1936 does not apply.
In determining liability to Australian tax on foreign sourced 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.
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.
The pension income paid to the ex-spouse that relates to the entitlement transferred is not income of the taxpayer as the taxpayer has no legal entitlement to that income. Therefore, Article 18 of the German Agreement does not apply to the taxpayer in respect of that pension income. However, the pension income that the taxpayer receives in respect of their own entitlement will be taxable in Australia under Article 18 of the German Agreement.
Accordingly, the pension income paid to the ex-spouse will not be assessable income of the taxpayer under subsection 6-5(2) of the ITAA 1936. As the taxpayer is an Australian resident, the pension income that the taxpayer receives in respect of their own entitlement will be assessable under subsection 6-5(2) of the ITAA 1936.