Assessability of an annuity received by resident taxpayer from the United States of America

Is the annuity income received by a resident taxpayer from the United States of America (US) assessable under section 27H of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes. The annuity income received by a resident taxpayer from the US is assessable under section 27H of the ITAA 1936.

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

The taxpayer receives periodically at stated times, annuity payments from a US resident insurance company.

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary derived directly or indirectly from all sources during the income year.

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the ITAA 1936 which provides that annuity amounts are included in the assessable income of the taxpayer (excluding, in the case of an annuity that has been purchased, the deductible amount in relation to the annuity for the year of income (as determined by the section)).

In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, 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 ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule 2 to the Agreements Act contains the double tax convention between Australia and the United States of America (the US Convention). Schedule 2A of the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid double taxation of income received by Australian and US residents.

Paragraph (3) of Article 18 of the US Convention provides that annuities paid to an individual who is a resident of Australia shall be taxable only in Australia.

Paragraph (5) of Article 18 of the US Convention defines 'annuities' as stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).

The annuity received by the taxpayer from the US resident insurance company comes within the definition of an 'annuity' under paragraph (5) of Article 18 of the US Convention.

As the taxpayer is a resident of Australia for income tax purposes, paragraph (3) of Article 18 of the US Convention applies and the annuity income received from the US will form part of the assessable income of the taxpayer under section 27H of the ITAA 1936.