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Ruling

Subject: Foreign source pension

Question

Is the foreign pension income paid under a deferred pension scheme to you as a resident of Australia, assessable in Australia?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts and circumstances

You are an Australian resident for income tax purposes.

You received a lump sum payment from Country X's pension deferral scheme.

You paid no tax in Country X on the payment received.

You stated the pension deferral scheme is similar to the Australian government pension bonus scheme.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 52-10(1A)

International Tax Agreements Act 1953 Section 4

Reasons for decision

Summary

The lump sum payment of deferred pension you received forms part of your assessable income as it is not exempt income under the taxation legislation.

Detailed reasoning

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, whether in or out of Australia, during the income year.

Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997. However, an Australian sourced pension bonus is specifically treated as exempt from income tax pursuant to subsection 52-10(1A) of the ITAA 1997.

Subsection 52-10(1A) of the ITAA 1997 provides that:

Payments of pension bonus and pension bonus bereavement payment under part 2.2A of the Social Security Act 1991 are exempt from income tax.

The deferred pension payment was not made under Part 2.2A of the Social Security Act 1991. Therefore, subsection 52-10(1A) of the ITAA 1997 does not cover this lump sum payment.

In determining liability to Australian tax on foreign sourced income 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 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

A tax treaty exists between Australia and Country X. The tax treaty operates to avoid the double taxation of income received by Australian and Country X residents.

An article of the tax treaty provides that any pension (including government pension) paid to an Australian resident shall be taxable only in Australia.

An amount received as a lump sum representing a deferred pension is ordinary income and forms part of the assessable income of the taxpayer in the year of receipt.

Accordingly, as you are an Australian resident your assessable income will include the deferred pension income from Country X under subsection 6-5(2) of the ITAA 1997.