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Ruling

Subject: Foreign pension lump sum

Question 1

Is the foreign pension lump sum payment assessable income in Australia?

Answer

Yes

Question 2

Is the lump sum payment eligible income for the purposes of calculating your entitlement to a lump sum in arrears tax offset?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You are an Australian resident.

You receive a pension from Country X.

Your spouse worked in Country X and put money aside from their salary to contribute to the pension.

Your spouse never received the pension.

You began receiving the pension after the death of your spouse.

You received a lump sum payment.

The lump sum was an arrears of payments.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 159ZRA

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

Income Tax Assessment Act 1997 Subsection 768-105(1)

International Tax Agreements Act 1953 Section 4

Reasons for decision

Assessability of pension

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income derived from all sources, whether in or out of Australia, during the income year.

In determining liability to Australian tax on foreign source income, it is necessary to also consider any applicable double tax agreements (DTA) contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that the Acts are read as one.

Australia has signed a DTA with Country X, which is called the Agreement between Australia and Country X for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Country X Agreement).

Article 18 of the Country X Agreement deals with the taxation of pensions and annuities. It provides that a foreign pension paid to a resident of Australia is taxable only in Australia.

However, certain pensions are specifically made exempt from tax in Australia under subsection 768-105(1) of the ITAA 1997.

In your case, you are an Australian resident for tax purposes, and in receipt of a foreign pension. It is not specifically made exempt from tax in Australia.

Consequently, your foreign pension forms part of your assessable income under subsection 6-5(2) of the ITAA 1997. Therefore, as your underlying pension is taxable, so too is the lump sum payment that you received.

Lump sum in arrears tax 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 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 must not be less than 10% of the taxable income of the year of receipt after deducting the amount of the eligible lump sum that accrued in earlier years.

The lump sum payment of pension arrears is eligible income for the purposes of calculating your entitlement to a lump sum in arrears tax offset.

The Tax Office will calculate your lump sum in arrears entitlement when you lodge your 2011 tax return. You will need to include the lump sum in arrears payment at Question 24 'Other Income' in the supplementary section of the 'Tax return for individuals'.

In order for us to calculate your lump sum in arrears tax offset, you will need to provide the amount of your taxable income for each of the two most recent income years that the payment related to other than the 2011 income year.

Also, you will need to include a statement in your tax return that shows the portion of the lump sum in arrears payment that relates to each income year involved.