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Forward Thinking Magazine : December 2010
19 Summary Prima facie foreign pension payments are assessable income taxable at marginal tax rates in Australia. In certain cases some tax relief may be available from a section 27H deductible amount and/or foreign income tax offsets. If Australia has a DTA with the foreign country in question, that DTA may assign taxing rights of the foreign pension payments as follows: solely to Australia solely to the foreign country shared between the foreign country and Australia provide an exemption from taxation in both countries (e.g. in certain circumstances under the recently amended NZ DTA). In many cases where a client is in receipt of foreign pension payments it may be important to seek expert tax advice on both the foreign tax position and the operation of the relevant DTA. Techtalk Example Assume now that Ferdinand’s pension relates to government service in Country A, and that Country A’s DTA with Australia includes a Government Service article which allocates the taxing rights of the pension payments solely to Country A. Ferdinand will have no tax obligations in Australia with respect to his Country A government service related pension payments. Generally Government Service article applies? ‘Shall’ or ‘may’ be taxable in source country. May be exempt from tax in Australia (eg US DTA) Generally Pensions and Annuities article applies - usually taxable only in residence country (Australia) Australian foreign income tax offset (FITO) to reduce Aust tax, if any? Non-standard Pensions and Annuities articles: Canada, China, Indonesia, NZ and US Tax payable? Seek foreign jurisdiction tax advice Yes No The Government Service article Further complexity arises where foreign sourced pension payments are made in consequence of service to a foreign government. Many, but not all, of Australia’s DTAs include a Government Service article which in some cases allocates the taxing rights of pension payments made in consequence of government service to the source country. This treatment is in contrast to the Pensions and Annuities article, and overrides it. In some cases the Government Service article allocates sole taxing rights to the source country, whilst in other cases Australia may tax the pension payments also, with FITOs applying.