Assessability of government pension income received by an Australian resident from the United States

Is the government pension income received by an Australian resident taxpayer from the United States (US) assessable under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The government pension income received by an Australian resident taxpayer from the US is assessable under subsection 6-10(4) of the ITAA 1997.

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

The taxpayer is an Australian citizen.

The taxpayer was employed by the US Government in Australia.

The taxpayer receives a pension from the US Government.

Subsection 6-10(4) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes statutory income from all sources, whether in or out of Australia.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuity and superannuation pensions are included in assessable income.

In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1997 (except in some limited situations).

Schedule 2 to the Agreements Act contains the tax treaty between Australia and the United States of America (the US Convention). Schedule 2A of the Agreements Act contains the protocol amending the US Convention (the US Protocol). The US Convention and the US Protocol operate to avoid double taxation of income received by Australian and US residents.

Article 18(1) of the US Convention provides that subject to the provisions of Article 19, pensions paid to an individual who is a resident of Australia in consideration of past employment shall be taxable only in Australia.

Article 18(4) of the US Convention defines 'pensions' as periodic payments made by reasons of retirement or death, in consideration for services rendered or by way of compensation paid after retirement for injuries received in connection with past employment.

The pension received by the taxpayer from the US Government comes within the definition of a 'pension' under paragraph (4) of Article 18 of the USA Convention.

Article 19 of the US Convention provides that pensions paid from funds of the US for labour or personal services performed as an employee in the discharge of governmental functions to a citizen of the US shall be exempt from tax in Australia.

As the taxpayer is a citizen of Australia, Article 19 of the US Convention does not apply to exempt the tax on the US pension in Australia.

Accordingly, the US pension received by the taxpayer is included in the taxpayer's assessable income under section 27H of the ITAA 1936 and forms part of the taxpayer's statutory income under subsection 6-10(4) of the ITAA 1997.