Edited version of your private ruling

Authorisation Number: 1012510814938

Ruling

Subject: Lump sum pension arrears payment

Question 1

1. Is the lump sum payment of pension arrears (excluding the interest component of the lump sum payment of pension arrears) assessable income to the Estate?

2. Is the interest component of the lump sum payment of pension arrears assessable income in the year of receipt?

3. Does a lump sum in arrears tax offset apply to the interest component of the pension arrears payment?

Answer

1. No.

2. Yes.

3. No.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013.

Relevant facts and circumstances

You are the administrator of your parent's estate (the Estate).

Your parent (the deceased) was a member of a superannuation fund (the Fund).

The deceased's employment terminated in 1994 (at age over 55).

After the date of death (at age over 65), and following from a review of the deceased's entitlements from the Fund, the Fund decided that the deceased was entitled to an age retirement pension arrears payable for the period from the termination of employment to the date of death.

You sought a further review of the matter from the Fund and in a previous private ruling application, information was provided that the Fund had advised:

· the payment was not a death benefit but an arrears of pension that the deceased was entitled to after the termination of employment; and

· employment was not terminated as a result of disability but retirement;

You state the final resolution of this outcome comes after you have exhausted a number of processes and avenues of appeal regarding the deceased's Fund entitlement.

The Fund paid a lump sum payment of pension arrears in July 2013 with the PAYG payment summary - superannuation income stream for year ending 30 June 2014.

The Fund advised that the pension arrears ($A) representing the pension arrears payment, included interest owing and a summary of the amount payable showed interest ($B) had been added to the amount payable as at the date of death up to the date the payment was made by the Fund.

A summary of the pension breakdown for each financial year was provided including details of the recovery of contribution arrears owed to the Fund that was applied to the pension payment for an earlier financial year.

The Fund calculated the interest by reference to the pension payment for each year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 159ZR(1).

Income Tax Assessment Act 1936 Section 159ZRA.

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

Income Tax Assessment Act 1997 Section 301-10.

Income Tax Assessment Act 1997 Section 302-10.

Income Tax Assessment Act 1997 Section 307-5.

Reasons for decision

Summary

The total amount of pension payment arrears ($A) is not assessable income.

The amount of representing the interest component of the lump sum payment ($B) is assessable income. The lump sum interest payment is not eligible for a lump sum in arrears tax offset.

Detailed reasoning

Section 302-10 of the Income Tax Assessment Act 1997 (ITAA 1997) applies if you are the trustee of a deceased estate and you receive a superannuation death benefit in your capacity as trustee.

From the information provided, the Fund has advised the lump sum payment of arrears payment is not a superannuation death benefit but is a pension arrears amount including an interest component that was payable to the deceased in respect of entitlements from the Fund for the period the deceased's employment terminated to the date of death (the relevant period).

The Fund calculated the deceased was entitled to a gross amount of $C consisting of $A (pension arrears payments for the period from termination of employment to date of death) and $B (the interest component).

The interest component was calculated by reference to the amount of pension payment for each year in the period from termination of employment to the date of death in respect of the deceased's entitlement to a retirement pension from the Fund.

The Fund has completed a PAYG payment summary - superannuation income stream in respect of the lump sum payment of pension arrears.

The information provided by the Fund shows the lump sum pension arrears amount of the payment was the amount of superannuation income stream benefits referable to the period from the deceased's termination of employment to the date of death (the relevant period).

The lump sum of the superannuation income stream benefits was paid in the 2013-14 income year. The lump sum has been paid to the deceased estate but the deceased would have received the payment as a superannuation fund payment and a member benefit as defined in section 307-5 of the ITAA 1997, being a payment from a superannuation fund because the deceased was a fund member entitled to a superannuation income stream benefits.

Under the current law, if you are 60 years or over when you receive a superannuation benefit, the benefit is not assessable income and is not exempt income. Therefore the total pension payments worked out by the Fund for the relevant period, $A, would be tax free in the hands of the Estate.

Section 301-10 provides that all superannuation benefits are tax free if you are age 60 or over when you receive a superannuation benefit, that is, the benefit is not assessable income and is not exempt income.

Therefore the amount of $A (pension payments for the period for the relevant period) is not assessable income as it represents a payment of superannuation benefits that would have been rendered non assessable income due to the operation of section 301-10 of the ITAA 1997.

The interest component is not considered a superannuation benefit and can not be considered under section 301-10 of the ITAA 1997.

Section 6-5 of the ITAA 1997 is relevant for interest income payments. Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources. Interest income is considered to be ordinary income, and is assessable in the income year in which it is received. Therefore the interest payment received is assessable in the 2013-14 income year.

Taxpayers who receive assessable lump sum payments containing an amount that accrued in earlier income years may be entitled to a tax offset under section 159ZRA of the Income Tax Assessment Act 1936 (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 the year in which it accrued. The type of income eligible for this tax offset includes certain salary or wage income and other specified payments. However, interest income is not eligible for the tax offset (subsection 159ZR(1) of the ITAA 1936). Therefore no lump sum payment in arrears tax offset applies in your circumstances.