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Forward Thinking Magazine : December 2010
18 Is pension paid in relation to government services? Example Macquarie Adviser Services Macquarie Adviser Services Impact of foreign source taxation The Australian taxation position may be affected by any tax paid in the country where the payments are sourced. Tax paid in the source country may give rise to a foreign income tax offset (FITO) in Australia, which may reduce the amount of tax otherwise payable in Australia. FITO is limited to the amount of tax that would otherwise be payable in Australia and, unlike franking credits, FITO credits are not refundable. The impact of Australia’s FITO system is that tax revenue is often shared between the foreign country and Australia. Double tax agreements Australia now has double tax agreements (DTAs) with more than 40 countries worldwide. DTAs seek to provide relief from double taxation, avoid situations where income evades taxation in either country (unless that is the specific policy intention), and allocate the right to tax particular types of income between the two countries party to the agreement. The Pensions and Annuities article Most of Australia’s DTAs have a general ‘Pensions and Annuities’ article. Generally this article allocates the right to tax pension and annuity income to the country of residence of the income recipient. However some DTAs depart from that general position. Hence the specific DTA concerned should always be referred to prior to drawing any conclusions. In particular, the Pensions and Annuities article in the DTAs with Canada, China, Indonesia, New Zealand and the United States provide different results to the general position in certain circumstances. Ferdinand is an Australian resident receiving pension payments from a pension fund located in Country A. Country A withholds tax at 10 per cent on pension payments made to foreign residents. Ferdinand receives $9,000 per annum after tax paid in Country A from the foreign pension fund. He is required to include $10,000 in his Australian assessable income, and will receive a $1,000 FITO in relation to the tax paid in Country A. If Ferdinand’s Australian marginal tax rate is 31.5 per cent (including Medicare levy), his Australian tax liability will be $2,150 ($3,150 less $1,000 FITO). Effectively Ferdinand has paid $1,000 of tax to the government of Country A and $2,150 of tax to the Australian government. Note it is assumed that there is no section 27H deductible amount relating to Ferdinand’s pension payments. If Country A and Australia have entered into a DTA, and the usual structure of the Pensions and Annuities article applies, Australia will have the sole taxing rights of the pension income received by Ferdinand. Ferdinand will pay $3,150 of tax to the Australian government. There will be no FITO applicable as no tax is payable in Country A. Were services rendered in connection with trade or business? Yes No