Deductibility of loss in a later year of income where taxpayer receives exempt foreign pension

Is the social security pension derived by the Australian resident taxpayer from the United States of America (US) included in the calculation for deducting tax losses in a later year of income under section 36-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The US social security pension derived by an Australian resident taxpayer is included in the calculation for deducting of tax losses in a later year of income under section 36-15 of the ITAA 1997.

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

The taxpayer receives a social security pension from the US government.

The pension is not taxable in Australia under Article 18(2) of Schedule 2 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer is not in receipt of any other exempt income other than the social security pension from the US government.

The taxpayer's allowable deductions exceed the taxpayer's assessable income and the social security pension from the US government, resulting in a tax loss for the year.

The taxpayer carried forward the tax loss to a later year of income.

The taxpayer received the social security pension from the US government in that later year of income.

Section 8-5 of the ITAA 1997 allows deduction from assessable income an amount that can be deducted under a provision of the Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997.

Section 12-5 of the ITAA 1997 contains a list of provisions about specific types of deductions. Included in this list is Division 36 which deals with tax losses from earlier income years.

Section 36-10 of the ITAA 1997 (contained in Division 36 of the ITAA 1997) provides that a tax loss is incurred in any income year, if a taxpayer's allowable deductions (other than tax losses of earlier income years) exceeds assessable income and net exempt income (worked out under section 36-20 of the ITAA 1997) for that year.

Subsection 36-20(1) of the ITAA 1997 provides that the net exempt income of an Australian resident taxpayer is the amount by which the taxpayer's total exempt income (defined in section 6-20 of the ITAA 1997) from all sources (except excluded exempt income defined in subsection 36-20(3) of the ITAA 1997) exceeds the total of: (a) the losses and outgoings (except capital losses and outgoings) the taxpayer incurred in deriving that exempt income; and (b) any taxes payable outside Australia on that exempt income.

Subsection 36-20(3) of the ITAA 1997 provides that excluded exempt income is exempt income to which any of the provisions of the ITAA 1936 listed therein apply.

The US social security pension is not excluded exempt income as it is not covered by any of the provisions listed in subsection 36-20(3) of the ITAA 1997.

Subsection 6-20(1) of the ITAA 1997 provides that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of the ITAA 1936 or ITAA 1997 or another Commonwealth law.

Subsection 6-20(2) states that ordinary income is also exempt income to the extent that the ITAA 1997 excludes it (expressly or by implication) from being assessable income.

The social security pension received by the taxpayer from the US government is exempt from tax in Australia under Article 18(2) of Schedule 2 to the Agreements Act and therefore is exempt income for the purposes of subsection 6-20(1) of the ITAA 1997.

The net exempt income is calculated under subsection 36-20(1) of the ITAA 1997 after deducting the losses and outgoings incurred by the taxpayer in deriving the pension and the tax payable in the US.

Section 36-15 of the ITAA 1997 allows a tax loss for a loss year to be deducted in a later income year in the manner provided by that section. The deduction calculation includes net exempt income of a later income year.

The net exempt income received by the taxpayer will therefore be taken into account in working out the tax loss that may be available for the purposes of section 36-10 of the ITAA 1997.

Accordingly, the social security pension derived by the Australian resident taxpayer from the US in the later income year is included in the tax loss calculation for that later income year under section 36-15 of the ITAA 1997.

Note: if all of the tax loss cannot be deducted, then the undeducted amount is carried forward to the next income year (subsection 36-15(7) of the ITAA 1997.