Assessability of retirement pension received from France by a resident taxpayer which includes amounts not assessable for French tax purposes

Is a retirement pension received by a resident taxpayer from France, which includes supplementary amounts which are not assessable for French tax purposes, assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The entirety of the retirement pension received by a resident taxpayer from France, including supplementary amounts which are not assessable for French tax purposes, are assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia.

The taxpayer receives a pension from France.

The pension is paid from a French retirement fund.

The pension is not paid by the French Government.

The pension includes a base amount of pension plus various supplementary amounts.

The supplementary amounts are not assessable for French tax purposes.

The pension is an annuity within the meaning of subsection 27H(4) of the Income Tax Assessment Act 1936 (ITAA 1936).

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.

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

However, section 10-5 of the ITAA 1997 lists a number of provisions which vary or replace the rules that would otherwise apply for certain kinds of ordinary income. Included in this list is section 27H of the ITAA 1936.

Subsection 27H(1) of the ITAA 1936 provides that subject to subsection 27H(1A) and Division 54 of the ITAA 1997, the assessable income of a taxpayer of a year of income shall include: (a) the amount of any annuity derived by the taxpayer during the year of income excluding, in the case of an annuity that has been purchased, any amount that, in accordance with the succeeding provisions of this section is the deductible amount in relation to the annuity in relation to the year of income; and (b) the amount of any payment made to the taxpayer during the year of income as a supplement to an annuity, whether the payment is made voluntarily, by agreement or by compulsion of law and whether or not the payment is one of a series of recurrent payments.

Subsection 27H(1A) of the ITAA 1936 does not apply as that provision is concerned with payments from eligible resident non-complying superannuation funds. A payment from an overseas fund is not covered by this provision. Division 54 of the ITAA 1997 deals with payments made under structured settlements and structured orders and is not applicable in this case.

As the pension received by the taxpayer is an annuity as defined in subsection 27H(4) of the ITAA 1936, the base amount of the pension will be included in the taxpayer's assessable income under paragraph 27H(1)(a) of the ITAA 1936.

In addition, payments made to the taxpayer as a supplement to the pension will be assessable under paragraph 27H(1)(b) of the ITAA 1936. This ensures the total amount of the pension is included in the taxpayer's assessable income.

The fact that these supplements are not taxable for French tax purposes does not have any bearing on the assessability of the amounts under Australian tax law.

Accordingly, the supplements paid to the taxpayer as part of their pension entitlement will form part of the taxpayer's assessable income unless the Australian income tax law specifically provides for their exemption or the double tax agreement between Australia and France specifically exempts the amount.

Section 6-15 of the ITAA 1997 provides that if an amount is exempt income, it will be excluded from assessable income. Section 11-15 of the ITAA 1997 lists certain types of exempt income. Included in this list are various provisions of the ITAA 1997 and ITAA 1936 which deal with exempt amounts, including some overseas pensions. However, none of the provisions listed apply to a French retirement pension or supplements of the kind derived by the taxpayer.

Therefore, the gross amount of the pension (including the supplements) is not exempt income for the purposes of section 6-15 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 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.

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 18(3) of the French Agreement (which was amended by Article 7(3)(a) of the French Protocol) provides that any pension paid by, or out of funds created by, France or a political subdivision or a statutory body or local authority thereof to an individual in respect of services rendered to France will be taxable only in France. However, 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.

As the pension received by the taxpayer is not paid by the Government of France or a political subdivision, statutory body or local authority of France, Article 18 of the French Agreement does not apply.

Article 17(1) (which was amended by Article of 6(1) of the French Protocol) provides that pensions not covered by Article 18 of the French Agreement paid to residents of Australia are taxable only in Australia.

However, 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. Paragraph (4) of Article 81 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 French Pensions Code. Paragraphs (5) and (6) of Article 81 of the FGTC have been repealed.

As the taxpayer's pension is not paid under Articles L255 to L257 of the French Pensions Code, Article 17(3) of the French Agreement does not apply.

Article 17(4) of the French Agreement provides that notwithstanding Article 17(1), while paragraph 23(q) of the ITAA 1936 continues to have effect in relation to retirement pensions derived by residents of Australia from sources out of Australia, any retirement pension derived by a resident of Australia from sources in France shall, if the person deriving the pension so elects, be taxable only in France.

Paragraph 23(q) of the ITAA 1936 was repealed with effect from 1 July 1987. As such, Article 17(4) of the French Agreement no longer applies to allow a resident of Australia to have their French pension taxed in France.

Therefore, as the taxpayer is a resident of Australia, Article 17(1) of the French Agreement provides that the gross pension received by the taxpayer, which includes the supplements to the pension that are not assessable under French tax law, is assessable solely in Australia under section 27H(1) of the ITAA 1936 and is included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.