Assessability of Netherlands pensions derived by an Australian resident

Are the Netherlands 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 Netherlands Government service pension and social security pension are assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is an Australian resident for income tax purposes.

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

The pension paid is not in respect of services rendered in connection with any trade or business carried on by the Netherlands Government.

The type of 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 Netherlands social security pension.

The Netherlands Government service pension has been taxed in the Netherlands.

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 Netherlands Government service pension and the 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 10 to the Agreements Act contains the tax treaty and Protocol between Australia and the Kingdom of the Netherlands (the Netherlands Agreement). Schedule 10A to the Agreements Act contains the Second Protocol to the Netherlands Agreement (the Second Netherlands Protocol). The Netherlands Agreement and the Second Netherlands Protocol operate to avoid the double taxation of income received by Australian and Netherlands residents.

The relevant articles in the Netherlands Agreement are Article 18 which covers Pensions and Annuities and Article 19 which covers Government Service.

Article 18(1) provides that a pension (including a social security pension, but not including a pension to which Article 19 applies) payable to a resident of Australia shall be taxable only in Australia.

Article 19(1) provides that a pension paid for services rendered by the taxpayer to the Netherlands Government may be taxed by the Netherlands (see note below).

However, where such a pension is paid in respect of services rendered in connection with any trade or business carried on by the Netherlands Government, Article 19(2) provides for the pension to be taxed only by Australia under Article 18.

There is nothing under Article 19 or any other provision of the Netherlands Agreement that precludes Australia from also taxing the Government service pension, in accordance with its domestic law, where it is derived by an Australian resident. The absence of the word 'only' after 'may be taxed' in Article 19(1) 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 taxpayer will be assessed under subsection 6-5(2) of the ITAA 1997 in Australia on the Netherlands Government service pension and the social security pension income derived from the Netherlands.

Where the Netherlands exercises its right under Article 19(1) to tax the Government service pension, Article 23(1) and paragraph (5) of the Protocol operate to require the Netherlands tax paid to be allowed as a credit against Australian tax payable in respect of the Government service pension. As Netherlands tax has been paid by the taxpayer in respect of the Government service pension 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 : a resolution issued by the Netherlands State Secretary of Finance on 28 June 1996 (nr.IFZ96/863M) states that, under certain conditions, Netherlands government service pensions paid in consideration for services rendered to former Netherlands overseas territories (such as the former Netherlands East Indies) paid to non-residents of the Netherlands will be treated by the Netherlands, for tax treaty purposes, as a private pension (dealt with under Article 18 and taxable exclusively in Australia) rather than as a Government service pension.