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Edited version of private ruling

Authorisation Number: 1011647152042

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Ruling

Subject: Lump sum receipt

Is the lump sum payment made to you from a foreign Society assessable to you?

Yes.

This ruling applies for the following period

Income year ended 30 June 2009

Relevant facts

You are an Australian resident for income tax purposes since the early 1990s.

You received a lump sum from a foreign Society (the Society).

The constitution and rules of the Society has been provided and forms part of this ruling.

The registered Deed of payment states that:

    · You were instrumental in founding the Society.

    · You served as its principal from its inception.

    · Your spouse also served at the Society.

    · Both you and your spouse raised money by way of donations for the Society.

    · You continued to serve at the college as its Manager after your retirement.

    · A clause of the Constitution of society states that the objects for which the society is established are, to provide for the Society's permanent employees adequate superannuation, quarters, medical relief and leave.

In recognition and in appreciation of the continued services of you and your spouse to the Society, the Foundation members of the Society at a special General Meeting of the Society, passed a resolution to reward you and your spouse for your services to the Society. You are tp be paid a fixed sum per month pension and upon your death to your spouse be paid a lesser sum per month until their death.

In a subsequent letter, the Society wrote to the country authority requesting tax exemption on the payment made to you. In this letter, the Society states that at a special general meeting of the Society, a resolution was passed allowing you to be paid a lump sum superannuation in lieu of the monthly pension payments.

You subsequently provided a letter from the Society states that the lump sum given to you was a gratitude from the Society. The Society does not have a pension scheme and the gratitude payment made to you was erroneously called a pension pay out.

Relevant legislative provisions

Income Tax assessment Act 1997 Subsection 6-5(2)

International Tax Agreements Act 1953

International Tax Agreements Act 1953

International Tax Agreements Act 1953

Reasons for decision

Subsection 6-5(2) of the Income Tax assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.

You received lump sum from the Society.

The courts have identified a number of factors to assist in determining whether a particular receipt is ordinary income. These include:

      1. whether the payment is the product of any employment, services rendered, or any business (FC of T v. Harris 80 ATC 4238; (1980) 10 ATR 869)

      2. the quality or character of the payment in the hands of the recipient (Scott v. Federal Commissioner of Taxation (1966) 117 CLR 514; (1966) 14 ATD 286; (1966) 10 AITR 367)

      3. the form of the receipt, that is, whether it is received as a lump sum or periodically (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 5 AITR 443; (1952) 10 ATD 82 (Dixon's Case)), and

      4. the motive of the person making the payment. (Hayes v. Federal Commissioner of Taxation (1956) 96 CLR 47; (1956) 11 ATD 68; (1956) 6 AITR 248).

Therefore, it is necessary to look that the whole circumstances of the payment.

You received the lump sum in lieu of the monthly payments. The payment is a product of or related to your past employment and services rendered as the registered deed of the payment clearly state that the payment is in recognition and in appreciation of your continued services to the Society. Furthermore, it also states that the payment was made to you to reward you and your spouse for your services to the Society. You are a former employee of the Society. Therefore, the payment is related to your employment and for services rendered.

The payment in your hands has income character as it is a fixed regular payment that can be relied upon. The conversion of the fixed regular payments into a lump sum does not change the original income purpose, nature and character of the payment. The question whether a 50% commutation of a pension could be regarded as an "allowance" arose for consideration in McIntosh v. Federal Commissioner of Taxation 79 ATC 4325; (1979) 10 ATR 13. The Federal Court found that an amount commuted to a lump sum one week after retirement could be said to be an "allowance". It was determined that when an amount is paid which represents the capitalised or total value of other sums, it is not the amount paid but the other sums which must answer the description of allowance. A stipend payable to one whose wages had ceased on retirement and the lump sum amount paid in lieu of half of that stipend retains the character of the original payment.

The intent and purpose of the payment is to provide a form of Superannuation income to you, as the deed of the payment states that; one of the objects of the Society is to provide adequate Superannuation to its employees.

In addition, the country revenue authority exempted the lump sum payment as Superannuation in lieu of monthly pension from foreign country tax as 'income not taxable in relation to any pension received by a resident or a non-residence individual'. Hence, the country tax authority accepts the payment as a pension and exempts it from tax on this basis.

A subsequent letter from the Society obtained by you identifies the payment as a gratuity. This does not change the original purpose, intent and character of the payment as documented in the minutes and registered deed of the Special General meeting of the Society when the payment was made.

Furthermore, even if you state that the payment is a gift or gratuity, (although we do not accept the payment as a gratuity) due to the circumstances of the payment it is still assessable to you as income in accordance with the principles outlined in Taxation Ruling IT 2674.

IT 2674 provides guidelines in determining whether gifts received by church workers and missionaries are assessable income. Paragraph 4 of IT 2674 states that the principles that apply in determining whether gifts received by church workers are assessable income are no different from those which apply in determining whether gifts received by taxpayers in other occupation or calling.

Paragraph 12 of IT 2674 provides that gifts are assessable if the gift is made in relation to any income producing activity that can arise from any office or occupation or some services rendered or to be rendered. It states that, a gift (even if it is a receipt of a one-off nature) is assessable income if it is possible to:

      5. relate the receipt of the gift by the recipient to any income-producing activity on their parts, or

      6. point to any employment, personal exertion or other income-earning activity by the recipient of which the receipt of the gift is in a relevant sense a product or incident.

In your case, the deed of payment outlined your services to the Society. In particular, it states that in recognition and in appreciation of your continued services to the Society, it passed a resolution to reward you and your spouse for your services with a fixed regular payment intended as a pension payment. This payment is then converted into a lump-sum payment. Therefore, the payment is clearly related to your past services rendered and you were an employee of the Society.

Paragraph 13 of IT 2674 provides that a gift received in these circumstances is assessable income even if:

    (a) the donor is not legally obliged to make the gift; or

    (b) gift is made by a family member, friend or fellow worker; or

    (c) if the church worker is an employee, the gift comes not from the employer but from somebody else; or

    (d) the gift is made so that the church worker can acquire a capital asset; or

    (e) the gift is received in kind rather than in money; or

    (f) the gift is received on a special occasion such as Christmas or a birthday (but see paragraph 21); or

    (g) the church worker is not in any way motivated by the prospect of receiving the gift but is motivated only by a genuine commitment to religious beliefs.

Hence, even if the payer is not obligated to make the payment, or even if you had no expectations or were motivated by the prospect of the payment, and whether it is a one off payment, the payment made in relation to services rendered by you is assessable income in your hand.

Furthermore, paragraph 14 of IT 2674 provides that gifts are often made both as an expression of goodwill towards the person personally and also as a reward for some income producing activity or in recognition of the church worker's calling or occupation. If a substantial reason (it does not have to be the dominant reason) a gift is paid in relation to the occupation or some income producing activity on the part of the recipient, the gift is assessable as income, even though the gift is also received on personal grounds.

Accordingly, even if you argued that at some level the payment is made on personal grounds (although not accepted), as the dominant purpose of the payment as evident in all the documents provided is in recognition and appreciation for your services and to reward you for your services rendered, it is assessable to you.

In conclusion, the lump sum payment made to you in lieu of the fixed regular monthly payment is income assessable to you under subsection 6-5(2) of the ITAA 1997.

In determining the liability to Australian tax on foreign sourced income it is also necessary to look at the applicable tax treaty provisions contained in the International Tax Agreements Act 1953 (Agreements Act).

The Agreements Act contains the tax treaty between Australia and country X (Country X Agreement) that operates to avoid the double taxation of income received by Australian and Country X residents.

The Country X Agreement, pensions (other than pensions paid in respect of services rendered in the discharge of government functions, usually Government pensions) and annuities paid to a resident of Australia shall be taxable only in Australia.

The Country X Agreement provides that items of income of an Australian resident which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable only in Australia.

Hence, whether the payment is a pension or other form of income not covered in the other Articles of the Country X Agreement, it is taxable in Australian in view of the Country X Agreement.

Consequently, the lump sum payment made to you from the Society is assessable to you in Australia under subsection 6-5(2) of the ITAA 1997.