Assessability of Australian government service pension received by Swedish resident

Is an Australian government service pension received by a resident of Sweden, assessable under subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The Australian government service pension received by a resident of Sweden is assessable under subsection 6-5(3) of the ITAA 1997, however the taxpayer will be entitled to a deduction from tax in Sweden for tax paid in Australia.

The taxpayer is an Australian citizen who worked in the Defence Forces of the Commonwealth of Australia.

The taxpayer is a resident of Sweden for tax purposes.

The taxpayer receives a superannuation pension from Comsuper.

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Pensions are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax on Australian sourced income received by a non-resident, 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 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 17 to the Agreements Act contains the agreement between Australia and Sweden (the Swedish Agreement).

Paragraph (3) of Article 18 of the Swedish Agreement provides that a government pension paid by Australia to a Swedish resident that was in respect of services to Australia may be taxed in Australia if the person is a citizen of Australia.

Taxation Ruling IT 2665 outlines the Commissioner's position on the treatment of Swedish government pensions paid to Australian residents. Paragraph 3 of IT 2665 states that: Swedish government service pensions or social security pensions paid to a resident of Australia who is a citizen of Sweden may be taxed by both countries under the Australia/Sweden Double Taxation Agreement

Applying the principle of reciprocity, Australia therefore has the right to tax Australian government service pension income of an Australian citizen who is a resident of Sweden.

To eliminate double taxation of income, paragraph (3) of Article 24 of the Swedish Agreement provides that where a resident of Sweden derives income which may be taxed in Australia, Sweden will allow a deduction from tax on the income of the person, an amount equal to the tax paid in Australia. The amount of the deduction is not to exceed that part of the income tax, as computed before the deduction is given, which is appropriate to the income which may be taxed in Australia.

Accordingly, the Australian government service pension income received by the resident of Sweden will be assessable in Australia under subsection 6-5(3) of the ITAA 1997. The taxpayer will be entitled to a deduction from Swedish tax for the amount of tax paid in Australia.