Issue
Is the widow's pension received by an Australian resident taxpayer from the French government assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The widow's pension received by an Australian resident taxpayer from the French government is not assessable under subsection 6-5(2) of the ITAA 1997 as Article 18(3)(a) of Schedule 11 to the International Tax Agreements Act 1953 (the Agreements Act) applies.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is not a citizen of Australia.
The taxpayer's spouse was a member of the French armed forces.
The taxpayer's spouse was paid a pension by the French government under the French Code des pensions militaires d'invalidite et des victimes de la guerre - Disability and Victims of War Military Pensions Code (the Pensions Code).
Following the death of the taxpayer's spouse, the taxpayer receives a widow's pension from the French government under Article L43 of the Pensions Code.
Reasons for Decision
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.
Widow's pension is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.
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 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 11 to the Agreements Act contains the double tax agreement between Australia and the French Republic (the French Agreement). Schedule 11A to the Agreements Act contains the protocol amending the French Agreement (the French Protocol). The French Agreement and the French Protocol operate to avoid the double taxation of income derived by Australian and French residents.
Article 17(1) of the French Agreement (which was amended by Article of 6(1) of the French Protocol) provides that, subject to the operation of Article 18(3) of the French Agreement, pensions paid to residents of Australia are taxable only in Australia.
Article 17(3) of the French Agreement provides that notwithstanding anything in the French Agreement, the pensions referred to in paragraphs (4), (5) and (6) of Article 81 of the French General Tax Code (FGTC) shall be exempt from Australian tax so long as they are exempt from tax in France. Article 81(4) of the FGTC refers to pensions for disability arising out of military service and for victims of war mentioned in Articles L255 to L257 of the Pensions Code.
Article 18(3) of the French Agreement (which was amended by Article 7(3)(a) of the French Protocol) provides that any pension paid by France to an individual in respect of services rendered to France will be taxable only in France. Article 18(3)(b) of the French Agreement provides that such pensions will be taxable only in Australia if the individual is a resident of, and a citizen of, Australia.
The expression in Article 18(3)(a) of the French Agreement 'in respect of services rendered' does not require the rendering of services by the individual receiving the pension. The Article only requires the payment of the pension to an individual in respect of services rendered to France or a political subdivision or a statutory body or local authority. Therefore, the widow's pension received by the taxpayer is subject to Article 18(3)(a) of the French Agreement.
Even though the taxpayer is a resident of Australia for income tax purposes, Article 18(3)(b) of the French Agreement will not apply as the taxpayer is not a citizen of Australia.
As the taxpayer's pension is not paid under Articles L255 to L257 of the Pensions Code, Article 17(3) of the French Agreement will not apply.
Accordingly, the widow's pension received by the taxpayer will not be assessable under subsection 6-5(2) of the ITAA 1997 as Article 18(3)(a) of the French Agreement operates to give France the sole taxing rights over the pension.