Tong and Commissioner of Taxation

[2007] AATA 1234

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2007] AATA 1234

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No NT2006/372

TAXATION APPEALS  DIVISION		)
Re		CLEMENT KAM MAN TONG

Applicant

And COMMISSIONER OF TAXATION

Respondent

DECISION

Tribunal Ms G Ettinger, Senior Member

Date16 April 2007

PlaceSydney

Decision The decision under review is affirmed.

................(Sgd)..............................

Ms G Ettinger     
  Senior Member

CATCHWORDS

Foreign civil service pension – meaning of derived/received – whether exempt income – whether ordinary income, statutory income - pension taxed as assessable income in year of receipt - decision under review affirmed.

Income Tax Assessment Act 1936
Income Tax Assessment Act 1997
Taxation Ruling  IT 2480,  2441,  2554

Case R79 84 ATC 543
Cooper v Federal Commissioner of Taxation [2003] AATA 296
The Commissioner of Taxes (South Australia v The Executor, Trustee and Agency Company of South Australia Limited  (1938) 63 CLR 108
Chong v Federal Commissioner of Taxation (2000) 101 FCR 134

REASONS FOR DECISION

16 April 2007 Ms G Ettinger, Senior Member     

1.      Mr Clement Kam Man Tong, the Applicant, served in the Hong Kong civil service from 1 August 1955 until he retired on 1 October 1986. He receives a pension from Hong Kong. Mr Tong has been a resident of Australia since 28 February 1988. He disputes the Commissioner of Taxation’s view expressed in the assessment regarding his 1998/99 tax return that he must pay tax on his Hong Kong pension of $53,396, received in that year.

2.      Mr Tong argued vigorously before me that his pension was derived during his time as a civil servant when he was not in Australia, and submitted that, further, the pension commenced to be paid during his residency in Hong Kong after his retirement in 1986. He submits that the Commissioner is in error in holding the pension to be derived in Australia, and claims that it is derived in Hong Kong, and is exempt income, and should therefore not be included as assessable income.

3. Mr Tong has appealed against the decision of the Commissioner, and was self represented at the hearing before me. The Respondent Commissioner was represented by his advocate, Ms J Damyan. I had before me documents served pursuant to section 37 of the Administrative Appeals Tribunal Act 1975, and comprehensive written submissions from both parties.

4.      On review of the documents, evidence, submissions, case law and the legislation before me, I found that the Hong Kong pension payment of $53,396 Mr Tong received in the 1998/99 year is assessable income. My reasons follow.

ISSUE BEFORE THE TRIBUNAL

5.      The issue before the Tribunal was whether the Hong Kong foreign civil service pension income of $53,396 received by Mr Tong has been correctly included as assessable income by the Commissioner for the 1998/99 income tax year. 

LEGISLATIVE CONTEXT

6.      The relevant legislation is the Income Tax Assessment Act 1936 and  the Income Tax Assessment Act  1997. 

MR TONG’S ARGUMENT

7.      Mr Tong made lengthy oral and written submissions, and I appreciated him taking the time to prepare those. Essentially, in summary, he disagrees with the Commissioner that the pension he receives from Hong Kong is taxable in the year it is received, the particular year in question being 1998/99. He argues that the pension was derived during the period he accrued it, that is during the years of his service, 1955 – 1986, and it cannot be derived “again”. He submits his pension payment is a deferred payment, and therefore not assessable. Mr Tong also argues that he had commenced receiving the pension payments after his retirement, and before he arrived in Australia in 1988.  He did not agree with the principles as iterated in the case law referred to by Ms Damyan.

8.      Mr Tong submitted that his monthly pension was exempt income pursuant to Taxation Ruling IT 2441, and that the ITAA 1997 does not apply to foreign earnings derived by taxpayer before the date of its commencement. 

9.      He also objected to the characterisation of his pension as an annuity as his understanding of an annuity is that it is able to be purchased, and his pension was accrued as a result of service, and not purchased.

THE COMMISSIONER’S ARGUMENT

10. The Commissioner submitted that the Applicant’s pension payments were both ordinary income and statutory income (section 27H of the ITAA 1936). He considers that the civil service pension payments received by Mr Tong during the 1998/9 year are assessable income, and not exempt income of Mr Tong.

11.     The Applicant is considered by the Commissioner to have derived the payments when he received them, or constructively received them i.e. when they were paid into his bank account. (Case R79 84 ATC 543, Cooper v Federal Commissioner of Taxation [2003] AATA 296, and The Commissioner of Taxes (South Australia v The Executor, Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108).

12.     Even though Mr Tong became entitled to the pension payments as a result of his service in Hong Kong, the Commissioner does not accept that the payments were derived during the period of his employment.

13. The Commissioner does not accept that the pension payments may be exempt from income tax under section 23AG of the ITAA 1936 and considers them to be assessable income pursuant to section 27H of the ITAA 1936.

14.     The Commissioner considers that the payments are an annuity because they have the indicia of an annuity (IT 2480).

15.     The Commissioner’s submissions detailed the case law on which he relied.

THE TRIBUNAL

16.     I have considered the legislation and the case law, as well as the evidence and the submissions of both parties which have been of assistance to me in my deliberations.

17.     There is no disagreement as to the facts, and I accept that Mr Tong retired from his civil service work in Hong Kong, took up residence in Australia in 1988, and receives a civil service pension as a result of his civil service in Hong Kong. The only issue I have to decide is whether the $53,396 received by Mr Tong in the 1998/9 tax year is assessable income or whether it is exempt.

18.     Section 6-5(1) of the ITAA 1997 states that: “Your assessable income includes income according to ordinary concepts, which is called ordinary income.”

19.     Section 6-5(2) of the ITAA 1997 deals with ordinary income and states  that if you are an Australian citizen, your assessable income includes the ordinary income you derived directly or indirectly from all sources whether in or out of Australia during the income year.

20.     Section 6-5(4) of the ITAA 1997 states that “In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf of as you direct.”

21.     Characteristics of income according to ordinary concepts are not defined in the legislation, but the case law has identified that it has some or all of the following characteristics:

·     It is received periodically

·     It is earned as a result of work performed

·     It is expected

·     It is relied upon and

·     It replaces income

22.     A priori therefore, Mr Tong’s pension payments derived and paid to him in the 1998/99 year, are ordinary income pursuant to section 6-5(1) of  ITAA 1997.  This is because the payments have the characteristics of ordinary income in that they are received periodically, they have been earned as a result of work performed, and they are expected and relied upon.  Section 6-5(2) states that your assessable income includes the ordinary income you derived directly or indirectly from all sources whether in or out of Australia during the income year. Therefore, the fact that Mr Tong’s pension income was earned as a result of his civil service in Hong Kong, does not affect its character as ordinary income in Australia.

23.     As to statutory income; this is covered by section 6-10(4) of the ITAA 1997, which states that if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia.

24.     Section 6-10(1) of the ITAA 1997 states that “your assessable income also includes some amounts that are not ‘ordinary income’.  Section 6-10(2) of the ITAA 1997 states that “amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income”.         

25.     Section 6-15(1) states that “if an amount is not ‘ordinary income’ and is not ‘statutory income’ it is not assessable income (so you do not have to pay income tax on it).”

26. Section 6-15(2) of ITAA 1997 states that if an amount is exempt income, it is not assessable income. Further an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of Commonwealth legislation, including a provision of ITAA 1936 or ITAA 1997 (section 6-20).

27.     I have noted Mr Tong’s argument that he derived the income during his time as a civil servant in Hong Kong between 1955 and 1986, before he became a resident in Australia, and that it could not be held to have been derived a second time after his retirement, or in Australia. Mr Tong referred to section 6-5(4) of ITAA 1997 stating that taxable income must not only be received but also derived. I have noted that section 6-5(4) of the ITAA 1997 states that “In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf of as you direct.”  That means Mr Tong derived his $53,396 when it was paid into his bank account in the 1998/99 tax period.

28.     There is quite an amount of case law which is authority for the fact that pension income is derived when it is received, and taxed in the year of receipt.  One example is Case R79 84 ATC 543 where two taxpayers received pensions accrued as a result of the husband’s war service. The couple were taxed in the year in which they received the lump sum arrears.

29.     A leading case on the issue of derivation of income is Brent v Federal Commissioner of Taxation (1971) 125 CLR 418. In that case, the taxpayer was paid only $10,000 of a much larger amount ($65,250), which was receivable, but not paid in a given year. The High Court held that the amount of income derived by the taxpayer was the amount she actually received in the year in question. A similar conclusion was reached by the High Court in The Commissioner of Taxes (South Australia v The Executor, Trustee and Agency Company of South Australia Limited (1938) 63 CLR 108.

30.     Another case also mentioned by the Commissioner is Cooper v Federal Commissioner of Taxation [2003] AATA 296, a case where arrears of periodical invalidity pension payments paid as a lump sum were assessed in the year Mr Cooper received them rather than in the years in which the payments accrued.

31.     I noted that in Chong v Federal Commissioner of Taxation (2000) 101 FCR 134, the Federal Court held that the Commissioner had the right to tax a taxpayer’s Malaysian civil service pension pursuant to the Double Tax Agreement between Australia and Malaysia in the relevant years when the pension was received.

32.     Accordingly, I do not accept Mr Tong’s argument that pursuant to the taxation legislation he derived the pension payments during his civil service in Hong Kong. In terms of the income tax law, Mr Tong derived the pension payments when he received them or constructively received them, that is when the $53,396 was paid into his account in Australia in the 1998/99 tax year.

33. Mr Tong submitted also that he relies on IT 2441. I noted from the Preamble of IT 2441 that section 23AG of ITAA 1936 provides that earnings derived by an Australian resident individual from a continuous period of foreign service (as the holder of an office or an employee) are, depending on the length of the foreign service, fully or proportionately exempt from Australian income tax, provided the foreign earnings are not exempt from income tax in the country of source and any tax liability has been or will be paid. The section was first applicable to assessments for the year of income commencing on 1 July 1987. Mr Tong indicated at T3/15 that he had paid tax, and had a foreign tax credit of $3,091. This had been overlooked by the Commissioner in the submissions he made, and accordingly, the assertions made in paragraph 44 of his Outline of Submissions do not apply. I was mindful however, that the foreign tax paid had been recognised as a credit by the Commissioner in an assessment at T4/19.

34. I am mindful that the Commissioner has considered that Mr Tong’s civil service pension income can be characterised as an annuity, and have accordingly considered section 27H of the ITAA 1936 which is relevant in that it applies to annuities which were first payable after 1 July 1983. Annuities are not defined in the definition section of the legislation, nor for these purposes, in section 27H. Also relevant is Taxation Ruling IT 2480 as it lists certain characteristics of annuities, and cites case law in support of the argument. The Commissioner submitted that a pension received by a taxpayer as a result of his or her employment is considered to be an annuity for the purposes of section 27H of the ITAA 1936 because it has the characteristics of an annuity, being regular payments, and certainty as to the amount and term of the payments. Accordingly, Mr Tong’s pension payments are statutory income (section 27H of the ITAA1936). I accept the Commissioner’s view that Mr Tong’s pension is not exempt from income tax pursuant to section 23AG of ITAA 1936.

35.     Mr Tong claims that his pension is not an annuity because he did not purchase it.  That is so, and in any case I do not find it necessary to traverse the annuity argument, because I find that the pension payment Mr Tong received from Hong Kong in 1998/99 is assessable as ordinary and statutory income. I have noted that IT 2480 also applies to purchased annuities (which is not the case with Mr Tong), where there is additionally, a change of capital into income.

36. I noted further that there are provisions listed in section 11-15 of the ITAA 1997 which cover both ITAA 1936 and ITAA 1997, and deal with income which may be exempt. Section 6-15(2) of the ITAA 1997 states that if an amount is not ordinary income and not statutory income it is not assessable. Section 6-20(1) also states that an amount of ordinary income or statutory income is exempt income if it is made exempt from income tax by a provision of the ITAA or another Commonwealth law.

37. However there are no provisions in either ITAA 1936 or ITAA1997 which exempt from income tax, pension payments received by a taxpayer as a result of his or her employment. I find also that Mr Tong’s pension payments are not exempt from income tax pursuant to section 23q of the ITAA 1936 as section 23q does not apply to income derived after 1 July 1987. In that regard I have found that notwithstanding Mr Tong earned the entitlement to his pension prior to his retirement in October 1986, for purposes of this matter, he derived the $53,396 when it was paid to him in the 1998/99 year. Accordingly I find that Mr Tong’s civil service pension payments which he received in the year 1998/99 are not exempt income, and are therefore assessable income because the payments are ordinary and statutory income.

38.     I am also mindful that  there is no double tax agreement between Australia and Hong Kong. The double tax agreement between Australia and China does not apply to Hong Kong and hence cannot be of assistance.

39.     I am satisfied that Mr Tong has not discharged his onus pursuant to section 14ZZK of the Taxation Administration Act in proving that the assessment made by the Commissioner is excessive. I find that the Hong Kong pension payments made to Mr Tong in the 1998/99 year are not exempt income, and are accordingly assessable income.

40.     Therefore the decision of the Commissioner must be affirmed.

DECISION

41.     The decision under review is affirmed.

I certify that the 41 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member

Signed:         .....................................................................................
  Associate

Date/s of Hearing  27 February 2007 
Date of Decision  16 April 2007
The Applicant  Self Represented
Respondent’s Advocate           Ms J Damyan