Assessability of an Eligible Termination Payment received by a resident of Papua New Guinea

Is the taxpayer, a resident individual of Papua New Guinea for tax purposes, in receipt of an eligible termination payment (ETP) from a complying superannuation fund, liable to pay tax on this income in Australia under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The taxpayer, a resident individual of Papua New Guinea in receipt of an ETP from a complying superannuation fund, is liable to pay tax on this income under subsection 6-5(3) of the ITAA 1997.

The taxpayer is a resident of Papua New Guinea for income tax purposes.

The taxpayer receives an ETP from a complying superannuation fund resident in Australia.

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. Subsection 6-10(5) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes statutory income from all Australian sources and other statutory income that a provision includes on some basis other than having an Australian source.

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 Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer is a resident individual of Papua New Guinea, a country with which Australia has entered into a double tax agreement. Therefore, the double tax agreement between Australia and Papua New Guinea (the Papua New Guinea Agreement) contained in Schedule 29 to the International Tax Agreements Act 1953 (the Agreements Act) must be considered in determining whether the ETP received by the taxpayer is taxable in Australia.

Section 11T of the Agreements Act gives the Papua New Guinea Agreement the force of law in Australia.

Subsection 4(1) of the Agreements Act provides that the ITAA 1936 and the ITAA 1997 must be read as one with the Agreements Act.

Article 15 of the Papua New Guinea Agreement deals with dependant personal services and provides that salaries, wages and other similar remuneration including payments made in consequence of the termination of employment derived by a resident of Papua New Guinea in respect of an employment shall be taxable only in Papua New Guinea unless the employment is exercised in Australia. However, if the employment or services are performed in Australia, such remuneration may 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 Papua New Guinea Agreement.

Article 18 of the Papua New Guinea Agreement deals with pensions and annuities. Article 18(1) of the Papua New Guinea Agreement provides that pensions including government pensions and annuities paid to an individual who is a resident of Papua New Guinea shall be taxable only in Papua New Guinea.

Article 18(2) of the Papua New Guinea Agreement defines annuities to mean periodic payments.

An ETP is not a periodic payment and is therefore not within the scope of Article 18 of the Papua New Guinea Agreement.

Therefore the ETP received by the taxpayer is assessable under sections 27A to 27H of the ITAA 1936 as statutory income from an Australian source and forms part of the taxpayer's assessable income under subsection 6-10(5) of the ITAA 1997.