Assessability of Swedish pensions derived by an Australian resident

Are the Swedish Government service pension and social security pension derived by an Australian resident taxpayer assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 ( ITAA 1997)?

Yes. The Swedish Government service pension and the social security pension derived by an Australian resident taxpayer are assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

The taxpayer is a citizen of Sweden.

The taxpayer receives a pension paid by the Swedish Government in respect of services rendered to that government.

The pension received by the taxpayer is not the type of pension that falls within the definition of section 27H of the Income Tax Assessment Act 1936 (ITAA 1936).

The taxpayer also receives a Swedish social security pension.

The taxpayer pays Swedish tax on both pensions.

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.

In the present case, the Swedish Government service pension and the Swedish social security pension 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 received by an Australian resident, it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Taxation Agreements Act 1953 ( 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 17 of the Agreements Act contains the tax treaty between Australia and Sweden (the Swedish Agreement). This Agreement operates to avoid the double taxation of income received by Australian and Swedish residents.

The relevant article in the Swedish Agreement is Article 18 which deals with Pensions and Annuities. Article 18(1) provides that, subject to Article 18(3), any pension paid to a resident of Australia shall be taxable only in Australia. Article 18(3) provides that pensions paid by Sweden to any individual in respect of services rendered to Sweden and pensions paid under the social security scheme of Sweden and where the individual is a Swedish citizen may be taxed in Sweden.

There is nothing under Article 18(3) or any other provision of the Swedish Agreement that precludes Australia from also taxing the pensions, in accordance with the domestic law, where it is derived by an Australian resident taxpayer. The absence of the word 'only' after 'may be taxed' in Article 18(3) is significant and can be contrasted with Article 18(1) which includes the word 'only'.

As the taxpayer is an Australian resident for taxation purposes, the Swedish Government service pension and Swedish social security pension derived by the taxpayer from Sweden will be assessable income under subsection 6-5(2) of the ITAA 1997.

Article 24(1) operates to require the Swedish tax paid in respect of income derived by a person who is a resident of Australia to be allowed as a credit against Australian tax payable in respect of that income. As Swedish tax has been paid by the taxpayer in respect of the pensions that will also be subject to tax by the taxpayer in Australia, the taxpayer will be entitled to a foreign income tax offset under Division 770 of the ITAA 1997. Note: This ATO ID also applies to Government service pensions and social security pensions derived by an Australian resident taxpayer: • from the Government of the Kingdom of Denmark under Article 18(3) of the tax treaty between Australia and Denmark contained in Schedule 18 to the Agreements Act, and • from the Government of Finland under Article 17(3) of the tax treaty between Australia and Finland contained in Schedule 25 to the Agreements Act as the relevant Articles in both tax treaties contain similar wording to Article 18(3) of the Swedish Agreement.