Assessability of pension income received by a dual resident of Australia and the UK

Is the pension received from the United Kingdom (UK) by a dual resident taxpayer assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The pension received from the UK by a dual resident taxpayer is not assessable income under subsection 6-5(2) of the ITAA 1997 as it is taxable only in the UK under Article 17(1) of Schedule 1 to the International Tax Agreements Act 1953 (Agreements Act).

The taxpayer is a dual resident of Australia and the UK for income tax purposes.

The taxpayer has a permanent home in the UK and Australia and the taxpayer's family resides in the UK.

The taxpayer is a citizen of the UK.

The taxpayer receives government pension income from the UK while residing in Australia.

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.

Pensions received by the taxpayer are 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 necessary 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.

Schedule 1 to the Agreements Act contains the Convention and Notes between Australia and the UK (the 2003 UK Convention). The 2003 UK Convention operates to avoid the double taxation of income received by Australian and UK residents.

Article 4(3) of the 2003 UK Convention provides the rules where an individual is a resident of Australia and the UK for income 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 2003 UK Convention.

Article 4(3)(a) of the 2003 UK Convention provides that where an individual is a resident of both countries: • the individual shall be deemed to be a resident only of the country in which a permanent home is available to that individual • if a permanent home is available in both countries, the individual shall be deemed to be a resident only of the country with which the individual's personal and economic relations are closer (centre of vital interests).

Though the taxpayer has a permanent home in both Australia and the UK, the taxpayer has closer personal relations with the UK as the taxpayer's family resides in the UK. Therefore the taxpayer will be deemed to be a resident of the UK under Article 4(3)(a) of the 2003 UK Convention. ATO Interpretative Decision 2011/53 contains details of how the centre of vital interests is determined.

Article 17(1) of the 2003 UK Convention provides that pensions (including government pensions) paid to a resident of the UK will be taxable only in the UK.

Accordingly, the pension received by the taxpayer from the UK, while residing in Australia, is not assessable income under subsection 6-5(2) of the ITAA 1997.