Edited version of private ruling

Authorisation Number: 1011694830364

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Ruling

Subject: Foreign income

Question 1

Are the lump sum payments from life insurance policies in country X assessable in Australia?

Answer: No.

Question 2

Is the life insurance payout, to be paid in instalments from country X assessable in Australia?

Answer: Yes.

Question 3

Is the pension from country X assessable in Australia?

Answer: Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

Your spouse passed away and as a result of their death you received the following payments;

· two lump sum payments from life insurance policies held in country X

· a life insurance payout to be paid in instalments from country X

· a pension from country X.

There is a tax treaty between Australia and country X.

Relevant legislative provisions

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

International Taxation Agreements Act 1953

Reasons for decision

Lump sum life insurance payments

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

A lump sum amount from a life insurance policy is not ordinary income. It does not have the characteristics of ordinary income. The payment is received in a lump sum, therefore there is no element of periodicity, recurrence or regularity, and does not relate to personal services, property or the carrying on of a business.

Therefore, the lump sum payments you received from country X are not assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Life insurance paid in instalments

Ordinary income has generally been held to include three categories, namely income from rendering personal services, income from property and income from carrying on a business.

Other characteristics of income that have evolved from case law include receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

The life insurance instalment payments are considered ordinary income as they are expected, have an element of periodicity, recurrence and regularity.

The payments would constitute an annuity. The term 'annuity' means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time under an obligation to make payments in return for adequate and full consideration in money or money's worth.

Accordingly, the annuity paid as life insurance instalments is assessable in Australia under subsection 6-5(2) of the ITAA 1997.

Pension from country X

Pensions and annuities are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

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

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

An Article of the country X Agreement provides that pensions and annuities (apart from government service pensions) paid to a resident of Australia shall be taxable only in Australia.

Therefore, the annuity and pension you receive from country X are assessable in Australia under subsection 6-5(2) of the ITAA 1997. The amounts are assessable in the year that you receive them or when they are credited to you. The amounts are shown at item 20 in the TaxPack supplement.