Edited version of your written advice

Authorisation Number: 1012760036446

Ruling

Subject: Lump sum payment from a foreign superannuation fund

Question

Is your client entitled to a rebate of tax in respect of the lump sum payment received from their foreign superannuation fund?

Answer

Yes.

This ruling applies for the following period:

Year ending 30 June 2014

The scheme commences on:

1 July 2013

Relevant facts and circumstances

Your client is a member of a foreign pension scheme.

Under the rules of that scheme, members can choose to defer claiming their pension for a period of time.

Your client deferred their pension for a period of more than 12 months between 200X and 20XX.

Under the rules of the scheme, a member may choose one of two options:

• taking a higher weekly pension for life, or

• taking a one-off, lump sum payment if the member puts off claiming their pension for at least 12 months, and then getting their normal weekly pension for life.

Your client received a lump sum payment from the foreign pension scheme in the 2013-14 income year, representing the pension deferred plus interest.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Subsection 159ZR(1)

Income Tax Assessment Act 1936 Subsection 159ZRA(1)

Income Tax Assessment Act 1936 Section 159ZRB

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Division 54

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Australian Tax Treaties United Kingdom Convention Article 17(1)

Summary

The lump sum payment received from the foreign pension scheme represents income that accrued in an earlier year or years of income. Therefore, your client is entitled to claim a lump sum payment in arrears tax offset in the relevant year of income, if the lump sum payment in arrears is not less than 10% of your client's normal taxable income less the lump sum payment in arrears.

Once your client lodges their tax return for the 2013-14 income year with the required relevant details, the Australian Taxation Office (ATO) will calculate your client's entitlement (if any) to the lump sum payment in arrears tax offset.

Reasons for decision

Is the lump sum pension payment assessable as income from an annuity?

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) requires an amount of ordinary income to be brought to account as assessable income when it has been derived.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts which are not ordinary income but are included in assessable income by another provision.

Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes the statutory income from all sources, whether in or out of Australia, during the income year.

Particular types of assessable income are listed in section 10-5 of the ITAA 1997. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936), which provides that, subject to Division 54 of the ITAA 1997, the amount of any annuity derived by a taxpayer during the income year is to be included in the taxpayer's assessable income. An annuity, at common law, is a series of payments payable for the remainder of the life of the recipient or for a fixed term.

Division 54 of the ITAA 1997 exempts from income tax certain personal injury annuities and certain payments to reversionary beneficiaries.

As the foreign pension your client was entitled to is a series of payments payable for the remainder of the recipient's life, it will be considered to be an annuity for the purposes of section 27H of the ITAA 1936.

In this case, your client received a lump sum in the 2013-14 income year. This figure represents the amount of annuity which had accrued over the period from 200X to 20XX where your client had elected not to take the pension. The payment is thus considered to be a lump sum payment of an annuity in arrears.

As the pension received is not an annuity covered under Division 54 of the ITAA 1997, the lump sum payment is assessable to your client in the 2013-14 income year.

Double tax agreement

In determining your client's liability to pay tax in Australia, it is necessary to consider not only the domestic income tax laws but also any applicable international tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in a Convention listed in section 5 has the force of law. The Convention between the Government of Australia and the overseas Government for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital gains (overseas Convention) is listed in section 5 of the Agreements Act.

Article 17(1) of the overseas Convention advises that pensions (including government pensions) and annuities paid to a resident of Australia shall only be assessable in Australia.

Therefore, the lump sum payment received by your client is taxable only in Australia.

Lump sum in arrears tax offset

A lump sum amount received by a taxpayer with regards to a payment of an annuity in arrears is fully assessable when received. This is the case even though parts of the payment relate to earlier income years. However, individual taxpayers who have received lump sum payments containing an amount that accrued in earlier income years may be entitled to a lump sum offset under section 159ZRA of the ITAA 1936. The 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.

Under subsection 159ZRA(1) of the ITAA 1936 a taxpayer is entitled to a rebate of tax if the taxpayer's assessable income (for that year of income) includes one or more eligible lump sums and the total arrears amount is not less than 10% of normal taxable income excluding the lump sum payment in arrears. If eligible for the rebate, the rebate is then calculated in accordance with section 159ZRB of the ITAA 1936.

Subsection 159ZR(1) of the ITAA 1936 defines eligible lump sum, in relation to a year of income to mean:

…a lump sum payment of eligible income received on or after 1 July 1986 that is included in the assessable income of the year of income and accrued, in whole or in part, in an earlier year or years of income.

Under subsection 159ZR(1) of the ITAA 1936 eligible income includes a superannuation income stream or annuity.

Your client deferred their foreign pension for a period of more than 12 months between 200X and 20XX, choosing to receive the one-off lump sum payment option when they were ready to commence claiming their pension.

As the lump sum payment received by your client represents the accrual of pension payments that accrued in previous years of income (plus interest), the lump sum payment received by your client constitutes an eligible lump sum. Your client is therefore entitled to a lump sum payment in arrears rebate under subsection 159ZRA(1) of the ITAA 1936, if the lump sum received is not less than 10% of normal taxable income excluding the lump sum payment in arrears.

When your client lodges their income tax return for the 2013-14 income year, they may claim the tax offset by providing the following information in the Schedule of Additional Information at Item 24:

• the full amount of the lump sum payment in arrears that your client was credited with;

• the tax years to which the payment related and the amount attributable to each tax year (in Australian dollars); and

• the deductible amount of the undeducted purchase price of the annuity.

The ATO will use the information provided to calculate any applicable lump sum in arrears tax offset for your client.