Assessability of New Zealand 'surviving spouses pension

Is a New Zealand 'surviving spouses pension' received by an Australian resident taxpayer assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. A New Zealand 'surviving spouses pension' received by an Australian resident taxpayer is assessable under subsection 6-5(2) of the ITAA 1997.

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

The taxpayer's spouse was a member of the New Zealand armed forces who was discharged at the end of the Second World War.

The taxpayer's spouse was paid a war disability pension by the New Zealand government.

Following the death of the taxpayer's spouse, the taxpayer receives a 'surviving spouses pension' from the New Zealand government.

The 'surviving spouses pension' is not taxable in New Zealand.

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, whether in or out of Australia, during the income year.

Subsection 6-15(2) of the ITAA 1997 provides that any income that is exempt income will not be included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 53-10 of the ITAA 1997 which deals with wounds and disability pensions.

Item 5 of the table in section 53-10 of the ITAA 1997 provides that wounds and disability pensions are wholly exempt provided that the payment is: a) of a kind specified in subsection 315(2) of the Income and Corporation Taxes Act 1988 (ICTA) of the United Kingdom, and b) similar in nature to payments that are exempt under Divisions 52 or 53 of the ITAA 1997.

Subsection 315(2) of the ICTA of the United Kingdom provides that income from wounds and disability pensions are exempt from income tax if they are: a) wounds pensions granted to members of the naval, military or air forces of the Crown, or b) disablement or disability pensions granted to members, other than commissioned officers, of the naval, military or air forces of the Crown on account of medical unfitness attributable to or aggravated by naval, military or air-force service.

Section 53-10 of the ITAA 1997 has equivalent wording to the repealed paragraph 23AD(3)(c) of the Income Tax Assessment Act 1936 (ITAA 1936). The application of paragraph 23AD(3)(c) of the ITAA 1936 is considered in Taxation Ruling IT 2586 'Wounds and disability pensions paid by foreign government: whether exempt' .

Taxation Ruling IT 2586, paragraphs 4 and 5, states that the exemption provided in paragraph 23AD(3)(c) of the ITAA 1936 applies to any such pensions payable by any government and the exemption applies irrespective of the age of the pensioner.

In determining liability to Australian tax on foreign sourced income, it is relevant 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. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the double tax convention between Australia and New Zealand (the NZ Convention). The NZ Convention is designed to avoid double taxation with respect to income derived by Australian and New Zealand residents.

Article 18 of the NZ Convention provides that pensions including government pensions paid to residents of Australia are taxable only in Australia.

The 'surviving spouses pension' received by the taxpayer is not exempt under section 53-10 of the ITAA 1997 as it is not of a kind specified in subsection 315(2) of the ICTA of the United Kingdom or similar in nature to payments that are exempt under Divisions 52 or 53 of the ITAA 1997.

The exemption under subsection 315(2) of the ICTA of the United Kingdom to pensions which are paid to a person for wounds or disability caused in war or service does not extend to the widows of such persons.

As the taxpayer is an Australian resident for tax purposes, the assessable income of the taxpayer will include the New Zealand 'surviving spouses pension' under subsection 6-5(2) of the ITAA 1997.