Edited version of your written advice

Authorisation Number: 1051340296196

Date of advice: 19 February 2018

Ruling

Subject: Lump sum pension

Question

Is the lump sum payment received from the Country Y pension fund assessable in Australia?

Answer

Yes

Question

Is the arears amount paid to you from the Country y pension fund assessable in Australia?

Answer

Yes

Question

Are the interest amounts paid on both the lump sum and arears payments assessable in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You commenced working as a teacher in Australia a number of years ago.

You became an Australian citizen in the 200Y income year.

You have received a lump sum payment from the Country y pension fund.

You were able to collect your Country y pension when you turned 60.

You commenced collecting the pension when you were 62.

You received an arears payment from the pension fund along with interest on both the lump sum and arears payments.

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

International Tax Agreements Act 1953 Schedule 1 Article 17

Reasons for decision

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 and interest income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997.

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

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and 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 an Agreement listed in section 5 has the force of law. The country y Agreement is listed in section 5 of the Agreements Act.

The agreement operates to avoid the double taxation of income received by residents of Australia and The country Y.

Article 17 of the Country Y agreement provides that pensions paid to a resident of Australia shall be taxable only in Australia.

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

As you are a resident of Australia for taxation purposes the lump sum payment and arears payment you received is assessable income in Australia under subsection 6-5(2) of the ITAA 1997.

Article 11 of the country y DTA says:

1 Interest arising in a Contracting State and beneficially owned by a resident of the other Contracting State may be taxed in that other State.

The interest you received on the lump sum payment and the arears payment is assessable in Australia under 6-5(2) of the ITAA 1997.

Lump sum in arrears tax offset

Individuals 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 Income Tax Assessment Act 1936 (ITAA 1936).

A lump sum payment in arrears is a payment received in one tax year that includes income that accrued in previous tax years. The lump sum is assessable in the year of receipt, but taxpayers may be eligible for a tax offset to reduce the amount of tax they have to pay.

Lump sum payments in arrears would include back payments of pension that accrued in a period more than 12 months before the date of payment.

A lump sum payment in arrears tax offset is not available where the lump sum payment in arrears is less than 10% of the taxpayer’s normal taxable income less the lump sum payment in arrears.

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.

A taxpayer would include their assessable lump sum payments in arrears at the income tax return label – other income.

We calculate the tax offset amount based on the information provided at the label and also the information the taxpayer provides us in a separate ‘Schedule of Additional Information. The taxpayer would include in the schedule their details (name, address, tax file number etc.) and the amount of payment in arrears for each income year.