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Ruling

Subject: Lump sum in arrears pension payment

Question 1

Is your country X lump sum in arrears pension payment assessable in the year in which the payment is received?

Answer

Yes

Question 2

Can you offset your voluntary contributions against your lump sum in arrears pension payment?

Answer

Yes

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You became an Australian citizen.

You are eligible to receive a country X state pension.

You received a lump sum payment in arrears.

Your letter states that you are due arrears of a country X state pension and interest.

You agreed that they could deduct an amount from the arrears of the country X state pension and interest to pay for your voluntary contributions for the tax years.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5.

International Tax Agreements Act 1953

Reason for Decision

Is your lump sum pension assessable ?

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount of ordinary income to be brought to account as assessable income when it has been derived.

A lump sum payment in arrears is a payment that is received in one tax year that includes income that accrued in previous tax years. Income amounts are generally included in the calculation of a taxpayer's taxable income in the year which they are received.

The International Tax Agreements Act 1953 (the Agreements Act) contains the tax treaty between Australia and the country X (the country X Convention). The country X Convention operates to avoid the double taxation of income received by Australian and country X residents.

The country X Convention provides that pensions (including government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.

In your case you received a lump sum because you are due arrears of a country X state pension and interest.

Therefore, the lump sum payment forms part of the pension you receive from country X and is taxable only in Australia.

As your pension is not taxable in country X under the tax treaty between Australia and country X, you may need to inform the relevant payer of the country X pension that you are a resident of Australia for taxation purposes, so that tax will not be withheld from your pension in the future. If tax has been withheld from your pension in country X, you may be able to claim the tax back from the country X authority.

Question 2

Are contributions deductible from your pension?

The part of your annual pension or annuity income which represents a return to you of your personal contributions is free from tax. This tax free portion is called the deductible amount. It is also known as the undeducted purchase price (UPP) of your pension.

If you received a Category A pension, or a Category B Widow's pension from country X state pension service (previously known as the Y Insurance Scheme), you are entitled to a UPP deduction.

You can calculate your deduction by multiplying your annual country X state pension (in Australian Dollars) by Z% .

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