Edited version of private ruling

Authorisation Number: 1011533297836

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Ruling

Subject: Foreign Pension

Question:

Is the lump sum in arrears pension you received from Country A in the 2009-10 income year assessable income in Australia?

Answer:

Yes.

This ruling applies for the following period/s:

2009-10.

The scheme commenced on:

1 July 2009.

Relevant facts and circumstances

You are an Australian citizen.

You are also an Australian resident for income tax purposes.

For some time many years ago, you worked in Country A in a specific role for the government of Country A.

For another period some time later, you again worked in Country A in another specific role for the government of Country A.

With both jobs mentioned above, you contributed to a Country A State Pension.

Later you turned 65 and were expecting the pension to begin payment.

It was only until sometime in the 2009-10 income year that you were notified to be eligible to receive the pension, hence you received the pension as a lump sum in arrears payment that relates to several income years back including the 2009-10 income year.

The lump sum in arrears pension was taxed in Country A and relates to your government service.

You are currently receiving the pension on a monthly basis and not being taxed in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 159ZR(1)

Income Tax Assessment Act 1936 section 159ZRA

Income Tax Assessment Act 1997 subsection 6-10(4)

Reasons for decision

Subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes statutory income from all sources, whether in or out of Australia.

In determining liability to Australian tax on foreign sourced income received by a resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

A specific paragraph of a Schedule (the Country A Convention) of the Agreements Act provides that subject to the provisions of an article (Government Remuneration), pensions and other similar remuneration paid in consideration of past employment to an individual who is a resident of Australia shall be taxable only in Australia.

The government service pension you received from the Country A government comes within the definition of a pension under a paragraph of a second article of the Country A Convention.

The first mentioned article of the Country A Convention explains that remuneration, including pensions, paid from funds of the Country A for labour or personal services performed as an employee in the discharge of governmental functions to a citizen of Country A shall be exempt from tax in Australia.

The relevant documents and practices in relation to the first mentioned article of the Country A Convention indicate that Country A considers the phrase governmental function should be given a very narrow interpretation and that Australia has accepted this position for the purposes of the Country A Convention. This interpretation excludes non core government functions from being a governmental function for the purposes of the first mentioned article of the Country A Convention.

A specific paragraph of a Taxation Ruling provides that the term in discharge of governmental functions in Country A is understood to encompass functions traditionally carried on by a government such as military, diplomatic service, tax administrators and activities that directly support the carrying out of those functions. It would not include functions that are commonly found in the private sector (e.g. education, health care and utilities).

You were not engaged in the discharge of government function for the purposes of the first mentioned article of the Country A Convention. As such, the lump sum in arrears pension you received is not covered by that article of the Country A Convention. Instead, it would fall for consideration under a paragraph of the second mentioned Article of the Convention.

Therefore the Country A government service lump sum in arrears pension you received will be assessable income in Australia.

Note:

Lump Sum in Arrears Offset

Individual taxpayers, who receive certain assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (ITAA 1936). The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued.

To be eligible for the tax offset, the amount of the eligible lump sum that accrued before the year of receipt must not be less than 10% of the 'normal taxable income' of the year of receipt. Your normal taxable income is your taxable income less certain amounts, as defined in subsection 159ZR(1) of the ITAA 1936.

The Tax Office will calculate the amount of the tax offset on the issue of your 2009-10 income tax assessment. For more information, please refer to the Tax Pack 2010 Supplement, pages 32-33.

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