Are the payments you received exempt income for Australian income tax purposes under the Double Tax Agreement between Country Z and Australia?
Yes. This ruling applies for the following periods : Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX Year ended 30 June 20XX The scheme commenced on: 1 July 20XX
You are a citizen of Australia and Country Z. You have been residing in Country Z for a number of years. You have been a foreign resident for Australian income tax purposes for many years. You have been a resident for Country Z income tax purposes for many years. You are currently employed at Company Z in Country Z. Prior to the above you were a working in Australia, and eventually retired from your position in Australia. You were working in a similar area in Australia as the work you are doing in Country Z. Because of your previous service period with your Australian employer, you became eligible to receive a certain type of payment. The payments are distributed out of the profit available for distribution. The amount that is available is capped. You started receiving payments several years ago. Your Australian employer provided a Statement to you, stating your payment entitlement per month, payable for life. To date you have received a number of years' worth of payments. Following the end of each income year, you have received a letter providing information which is intended to assist in preparing your annual income tax return
Each of the Annual Summary suggests the entire amount of the payments received for that income year be reported in your tax return.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 subsection 6-20(2) International Tax Agreements Act 1953
Taxation of non-residents and the application of Double Tax Agreements (DTA) If you are a foreign resident, your assessable income includes: • the ordinary and statutory income you derived directly or indirectly from all Australian sources during the income year, and • other ordinary and statutory income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. In determining liability to Australian tax on Australian sourced income derived by a non-resident, it is necessary to consider not only the income tax laws but also any applicable Convention or Double Taxation Agreement per the International Tax Agreements Act 1953 (Agreements Act). The effect of subsection 4(1) of the Agreements Act is that Agreements are to be interpreted and read as one with the Income Tax Assessment Act 1936 (ITAA 1936) and the Income Tax Assessment Act 1997 (ITAA 1997). Subsection 4(2) of the Agreements Act deals with possible conflicts by effectively providing that the terms of the Agreements override those of the Assessment Act in the event of any inconsistency (with some exceptions).
Income that is not subject to tax in Australia by virtue of a provision of a double tax agreement is exempt income under subsection 6-20(2) of the ITAA 1997. As you are a resident of Country Z and the source of the PTPs you received is Australia, we must consider the DTA which is given the force of law domestically by section 5 of the Agreements Act. The DTA states: (1) Subject to the provisions of Article XX (Governmental remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State. (2) Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of Country Z shall be taxable only in the first-mentioned State. (3) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State.
(4) The term "pensions and other similar remuneration", as used in this Article, means periodic payments made by reason 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. (5) The term "annuities", as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered). The term 'pension' is not defined in the DTA and so its domestic law meaning must be considered. Taxation Determination TD 93/151 Income tax: are periodic workers' compensation payments made by Comcare, 'pensions' for purposes of the pensions articles in Australia's double taxation agreements (DTAs)? provides: 1...The term 'pension' is not defined in any of the DTAs and therefore takes the meaning it has under domestic law.
A pension is defined in the Macquarie Dictionary as '1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. an allowance or annuity.' The meaning of the term 'pension' was considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments The Full Federal Court decision Federal Commissioner of Taxation v Douglas ; Federal Commissioner of Taxation v Burns ; Federal Commissioner of Taxation v Walker which considered the meaning of 'pension' (among other issues) deferred to the decision in Tubemakers of Australia Ltd v Federal Commissioner of Taxation and the Macquarie dictionary definition. Application to your circumstances The payments you receive, being a resident of Country Z, in consideration of past employment, are taxable only in Country Z. The payments are a pension in that they are periodic payments made by reason of your retirement, in consideration for services rendered, in connection with your past employment.
As the essential characteristics of the ordinary meaning of 'pension' under Australian law are met, it follows that the payments are a pension for the purposes of Article 18 of the DTA. The payments are therefore subject to tax only in Country Z and are exempt income for Australian taxation purposes