Taxing rights over United Kingdom sourced pension income under the United Kingdom Convention where taxpayer is a temporary resident of Australia

Does the Australia - United Kingdom Double Taxation Convention (the UK Convention) prevent the United Kingdom (UK) from taxing UK sourced pension income derived by a temporary resident of Australia which is non-assessable non-exempt income for Australian tax purposes?

No. The UK Convention does not prevent the UK from taxing UK sourced pension income derived by a temporary resident of Australia which is non-assessable non-exempt income for Australian tax purposes.

The taxpayer is a resident of Australia for the purposes of Australian tax.

The taxpayer is also a 'temporary resident' of Australia as defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997).

The taxpayer derived pension income from the UK while the taxpayer was a temporary resident of Australia.

The taxpayer's UK sourced pension income is non-assessable non-exempt income under subsection 768-910(1) of the ITAA 1997

Schedule 1 to the International Agreements Act 1953 contains the UK Convention. Article 17(1) of the UK Convention provides that pensions, including governmental pensions, and annuities paid to a resident of Australia, shall be taxable only in Australia. On its own, Article 17(1) would prevent the UK from taxing UK sourced pension income derived by Australian residents.

However, Article 23(2) of the UK Convention provides that where, under the Convention, income is relieved from taxation in the UK (in this case, due to the UK not having a taxing right under Article 17(1)) and the individual is also exempt from tax in Australia by virtue of being a temporary resident within the meaning of the applicable tax laws in Australia, then the UK is no longer required to provide the aforementioned relief from taxation under the convention.

The expression 'exempt from tax' is not defined in the UK Convention, nor is it defined in Australia's domestic tax laws. Accordingly, the expression takes its ordinary meaning.

The Macquarie Dictionary defines the term 'exempt' as 'released from, or not subject to, an obligation, liability, etc.: exempt from taxes; one who is exempt from, or not subject to, an obligation, duty, etc.'. The ordinary meaning of the expression 'exempt from tax' therefore applies to situations where a person or a particular item of income is not subject to tax.

Accordingly, for the purposes of Article 23(2) of the UK Convention, the taxpayer is exempt from tax in Australia in respect to the UK pension income because of their temporary residence status under Australia's tax law. Therefore, due to the application of Article 23(2) of the UK Convention, the UK's right to tax the UK sourced pension income is not restricted by Article 17(1) of the UK Convention.