Assessability of a pension received by a South African / Australian dual resident

Is a South African sourced pension received by a South African / Australian dual resident assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)

No. The South African sourced pension is not assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is a South African permanent resident.

The taxpayer has family residing in both Australia and South Africa (SA).

The taxpayer has a property in SA, in which they have resided in for most of their life, and property in Australia in which they live whilst visiting their family in Australia.

The taxpayer does not rent out any of their properties whilst they are not living in them. They are permanently available to the taxpayer.

The taxpayer derives pension income from SA.

The taxpayer also derives income from Australia.

The taxpayer plans to live part of each year in SA and part of each year in Australia.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Pensions are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to tax on Australian sourced income, 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 Income Tax Assessment Act 1936 (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 42 to the Agreements Act contains the double tax agreement between Australia and South Africa (the SA Agreement). The SA Agreement operates to avoid the double taxation of income received by Australian and SA residents.

Article 4 of the SA Agreement provides the rules where an individual is a resident of Australia and South Africa for tax purposes (the 'tie breaker tests'). The tiebreaker tests ensure that the individual is only treated as a resident of one country for the purposes of applying the SA Agreement.

Article 4(2) of the SA Agreement states that where an individual is a resident of Australia and South Africa, then their residency status shall be determined in accordance with the following rules: (a) they shall be deemed to be a resident solely of the country in which they have a permanent home available to them, or (b) if they have a permanent home available to them in both Australia and South Africa, they shall be deemed to be a resident solely of the country of which their personal or economic relations are the closer.

The taxpayer has a permanent home available to them in both Australia and SA. The taxpayer derives income from both Australia and SA. The taxpayer also has family in Australia and in SA. The taxpayer has spent most of their life living in SA. The taxpayer does not intend to reside in Australia permanently and will still be spending part of each year in SA with their family there. As such, the taxpayer is considered to be a resident of SA for the purposes of the 'tie breaker' test.

Paragraph 66 of Taxation Ruling TR 98/17 states that where the tie breaker tests are used in determining the residence of an individual to a treaty partner country, the terms of the relevant double tax agreement should be referred to in determining the tax liability. TR 98/17 also states that where the tie breaker tests are used in determining the residence of an individual to a treaty partner country, the Australian resident status is not lost for the operation of the ITAA 1997 and the individual continues to be eligible, for example, for the tax-free threshold in respect of the Australian sourced income.

This means that even though the taxpayer is a resident of SA under the tie breaker tests, their Australian resident status is not lost for the operation of the ITAA 1997.

Article 18 of the SA Agreement deals with pensions. Article 18(1) of the SA Agreement states that a pension from sources in South Africa paid to a resident of Australia shall be exempt from tax in South Africa to the extent that the pension is included in taxable income in Australia.

As the taxpayer is a South African resident for the purposes of the SA Agreement and the pension has a South African source, Article 18(1) of the SA Agreement will not apply.

Article 21 of the SA Agreement deals with income not covered by any of the other Articles in the SA Agreement. Article 21(1) of the SA Agreement states that items of income of a resident of SA, wherever arising, not dealt with in the foregoing Articles of the SA Agreement shall be taxable only in SA.

The taxpayer's pension is not covered by any of the other Articles in the SA Agreement. Therefore, it will be taxable only in South Africa and not assessable under subsection 6-5(2) of the ITAA 1997.