Foreign Income Tax Offset: New Zealand government superannuation pension

Is the taxpayer entitled to a foreign income tax offset under Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997) in relation to a pension received from the New Zealand (NZ) Government Superannuation Fund?

No. The taxpayer is not entitled to a foreign income tax offset under Division 770 of the ITAA 1997 in relation to the pension received from the NZ Government Superannuation Fund because they have not paid foreign income tax on the income.

The taxpayer is an Australian resident for taxation purposes.

The taxpayer is retired and receives a NZ Government Superannuation Pension.

The NZ Government Superannuation Fund Amendment Act 1990 amended the NZ Government Superannuation Fund Act 1956 reducing existing allowances and annuities. The allowance received is now called a Free of Tax Annual Allowance.

The Free of Tax Annual Allowance is reduced by the amount referred to as the Free of Tax Reduction. The Free of Tax Reduction is an amount calculated in accordance with the formula in section 4 of the NZ Government Superannuation Fund Amendment Act 1990.

The Free of Tax Annual Allowance is non-assessable in NZ.

The Free of Tax Annual Allowance is assessable in Australia under section 6-5 of the ITAA 1997.

Subsection 770-10(1) of the ITAA 1997 states that you are entitled to a tax offset for an income year for foreign income tax, if you paid it in respect of an amount that is included in your assessable income for the year.

Subsection 770-15(1) of the ITAA 1997 defines 'foreign income tax' as follows: Foreign income tax means tax that: (a) is imposed by a law other than an Australian law; and (b) is: (i) tax on income; or (ii) tax on profits or gains, whether of an income or capital nature; or (iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953. Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty.

The taxpayer's Free of Tax Reduction is calculated by reference to the amount of NZ tax that would otherwise have been payable on the Free of Tax Annual Allowance, and the formula as set out in section 4 of the NZ Government Superannuation Fund Amendment Act 1990. The Free of Tax Reduction is the amount by which the Free of Tax Annual Allowance is reduced.

In HWE Jones v. FC of T 98 ATC 2263; (1998) 40 ATR 1048 ( Jones ), the Administrative Appeals Tribunal (AAT) considered the status of a reduction calculated pursuant to section 4 of the NZ Government Superannuation Fund Amendment Act 1990, and concluded that it was not a tax. In the judgment, the AAT stated at paragraph 16: So in the instant case, instead of the government paying the pensions and then taxing them, the transfer payment is avoided by reducing the pensions accordingly and not taxing the reduced pension.

Accordingly, the Free of Tax reduction is not a tax, nor is it a tax imposed by NZ law. Consequently, it is not a 'foreign income tax' for the purposes of subsection 770-15(1) of the ITAA 1997.

As a result, the taxpayer is not entitled to a foreign income tax offset under subsection 770-10(1) of the ITAA 1997 on the pension paid from the NZ Government Superannuation Fund.

Further, the note to subsection 770-15(1) of the ITAA 1997 states that where a foreign jurisdiction has a tax treaty with Australia having the force of law under the International Tax Agreements Act 1953 (Agreements Act), foreign income tax includes only tax which has been correctly imposed in accordance with that tax treaty.

In determining liability to Australian tax on foreign sourced income received by a resident, 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 Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one with the Agreements Act. Schedule 4 to the Agreements Act contains the tax treaty between Australia and NZ (the NZ Convention).

Article 23(1) of the NZ Convention provides that, subject to the provisions of the law of Australia, a credit for any tax paid in NZ under NZ law and in accordance with the NZ Convention will be allowed against Australian tax payable on income from NZ sources. As the Free of Tax Annual Allowance received is non-assessable in NZ, there has been no NZ tax paid under the law of NZ.

Article 18(1) of the NZ Convention provides that pensions paid to a resident of Australia shall be taxable only in Australia. Hence, the pension received from the NZ Government Superannuation Fund cannot be taxed in NZ under the NZ Convention. Consequently, even if it were recognised that the taxpayer had paid tax in NZ in respect of the pension received, such tax would not have been paid in accordance with the NZ Convention.

The AAT reached this conclusion in Jones at paragraph 20 which stated: ... if, to the contrary, it was found that the applicant was personally liable for income tax paid in New Zealand on the pension then that would appear to be contrary to the provisions of Article 19.1 of the Australia-New Zealand double tax treaty, the remedy, if any, being found in Article 25, the competent authority provision of that treaty.

The taxpayer has not paid any NZ tax on the Free of Tax Annual Allowance. Further, had the taxpayer paid NZ tax on the allowance, that tax would not be foreign income tax as defined in subsection 770-15(1) of the ITAA 1997.

As the taxpayer has not paid foreign income tax on the Free of Tax Annual Allowance, the taxpayer is not entitled to a foreign income tax offset under Division 770 of the ITAA 1997 in respect of that income.