Assessability of periodic payments made to Australian resident from Ireland

Are periodic payments received by a resident taxpayer from an Irish partnership to induce the taxpayer to leave the partnership assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The periodic payments received by a resident taxpayer from an Irish partnership to induce the taxpayer to leave the partnership are assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer was a partner in a partnership that carries on business in Ireland.

The taxpayer entered into a contractual arrangement with the continuing partners of the partnership to receive periodic payments.

The purpose of the arrangement is to induce the partner to leave the partnership.

The taxpayer did not provide consideration in any form to receive the periodic payments.

The taxpayer subsequently left the partnership.

The taxpayer receives periodic payments from the partnership in accordance with the arrangement.

The taxpayer receives a separate pension from the partnership's staff pension scheme in respect of their past service to the partnership.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income received from all sources, whether in or out of Australia, during the income year.

The payments received by the taxpayer from the partnership are ordinary income.

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 1997 and the Income Tax Assessment Act 1936 (ITAA 1936) so that those Acts are read as one.

Schedule 20 to the Agreements Act contains the double tax agreement between Australia and Ireland (the Irish Agreement). The Irish Agreement operates to avoid the double taxation of income received by Australian and Irish residents.

Article 19(1) of the Irish Agreement provides that pensions and annuities paid to a resident of Australia shall be taxable only in Australia.

Article 19(2) of the Irish Agreement defines the term 'annuity' to mean a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth.

As the taxpayer did not provide consideration in any form in order to obtain the periodic payment, the payments received by the taxpayer are not annuities for the purposes of Article 19 of the Irish Agreement.

The meaning of the term 'pension' is not defined in the Irish Agreement.

Article 3(3) of the Irish Agreement provides that in determining the meaning of undefined terms, unless the context otherwise requires, the term shall have the meaning which it has under the law of the country concerned.

Subsection 27A(1) of the ITAA 1936 defines a pension to mean a pension within the meaning of the Superannuation Industry (Supervision) Act 1993 or a pension within the meaning of the Retirement Savings Accounts Act 1997 .

However, those definitions refer to specific requirements imposed under Australian superannuation law. A more liberal approach is required in recognition of the international nature of a double tax agreement.

The Commissioner has issued Taxation Determination TD 93/151 which discusses the meaning of a pension for double tax agreement purposes in the context of workers compensation payments.

Paragraph 1 of TD 93/151 states that a pension is defined in The Macquarie Dictionary , 2001, 3rd edn, The Macquarie Library Pty Ltd, NSW as: '1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. an allowance or annuity.'

The meaning of the term 'pension' was also considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v. FC of T 93 ATC 4207; (1993) 25 ATR 183. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.

The OECD Model Tax Convention and Commentary are also highly relevant in interpreting double tax agreements (see Taxation Ruling TR 2001/13).

The OECD Commentary about Article 18 of the OECD Model Tax Convention refers to pensions paid in respect of private employment, widows' and orphans' pensions and pensions for services rendered to a State, political subdivision or local authority thereof.

The payments made to the taxpayer are not for injury and loss of wages or in consideration of past services or employment. The taxpayer receives a separate pension from the staff pension scheme in recognition of their services to the partnership. The payments made under the arrangement are made to encourage or induce the taxpayer to exit the partnership.

The payments received by the taxpayer are not a pension and therefore Article 19 of the Irish Agreement will not apply.

Article 23(1) of the Irish Agreement provides that items of income of an Australian resident which are not expressly mentioned in the foregoing Articles of the Irish Agreement shall be taxable only in Australia.

Article 23(2) of the Irish Agreement provides that if such income is derived from Irish sources, the income may also be taxed in Ireland.

As the payments made to the taxpayer are from sources in Ireland, both Australia and Ireland may tax the income under Article 23 of the Irish Agreement.

Article 25(1) of the Irish Agreement provides that, subject to the provisions of the law of Australia, a credit for any tax paid in Ireland in accordance with the Irish Agreement will be allowed against Australian tax payable on income from Irish sources.

Subsection 160AF(1) of the ITAA 1936 provides that where the assessable income of a resident contains foreign sourced 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.

Accordingly, as the taxpayer is a resident of Australia, the payments received by the taxpayer will be assessable under subsection 6-5(2) of the ITAA 1997. The taxpayer will be entitled to a foreign tax credit for the Irish tax paid on that income.

Note: where the Irish tax paid is greater than the Australian tax payable, the taxpayer is only entitled to a foreign tax credit equal to the value of the Australian tax payable and cannot recover any excess Irish tax paid. However, under section 160AFE of the ITAA 1936, any excess foreign tax credit can be carried forward for a maximum of five years for application against any future tax payable on the taxpayer's foreign income of the same class.