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Edited version of your written advice
Authorisation Number: 1051437813881
Date of advice: 5 October 2018
Ruling
Subject: Lump sum payment
Is the lump sum payment regarded as an annuity?
Answer
No
Question 2
Are you entitled to a lump sum payment in arrears tax offset in relation to the lump sum payment?
Answer
No
This ruling applies for the following period:
Year ended 30 June 2018
The scheme commenced on:
1 July 2017
Relevant facts
You are an Australian resident.
Your relation passed away.
Your relation had a foreign life insurance policy.
Under the policy you were entitled to a quarterly benefit for a period up to a specified event.
The life insurance benefit was paid as a lump sum, and includes retrospective periodic payments from the date of commencement of the quarterly payments.
You received a lump sum amount in the 2017-18 income year.
The policy was not part of a foreign Social Security system.
No further benefits are payable to you under the policy. No benefits were paid before the death of your relation.
The benefit is taxable in an overseas country.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 6-5
Income Tax Assessment Act 1936 section 27H
Income Tax Assessment Act 1936 section 159ZR
Income Tax Assessment Act 1936 section 159ZRA
Reasons for decision
Annuity
Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides that assessable income includes annuities and pensions paid from a foreign superannuation fund.
An annuity is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to include an annuity, within the meaning of the Superannuation Industry (Supervision) Act 1993.
The character of an annuity is discussed in Tax Ruling IT 2480. Paragraph 9 of IT 2480 highlights that an essential characteristic of a purchased annuity is that the capital amount paid is transformed into income, that is, in the ordinary case of the purchase of a life annuity for cash, the annuity is income into which the capital laid out has been transformed (Egerton-Warburton v DFC of T (1934) 51 CLR 568).
In your case, the benefits were paid as a lump sum. It is acknowledged that the benefits related to quarterly benefits, however the lump sum payment does not meet the definition of an annuity and is not regarded as an annuity for tax purposes.
As the payment is not an annuity, you are not entitled to claim a deduction for an undeducted purchase price (UPP). The lump sum payment does not have an UPP.
Lump sum payment in arrears tax offset
Under section 6-5 of the ITAA 1997, your lump sum is assessable in the 2017-18 income year. Although the lump sum payment accrued in earlier years, the lump sum is assessable income in the year of receipt. Therefore, as you received the lump sum payment in the 2017-18 income year, it is assessable in that income year.
Individual 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 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.
A person is entitled to a lump sum payment in arrears tax offset where:
● the assessable income of the taxpayer of a year of income includes an eligible lump sum, and
● the total arrears amount is not less than 10% of the amount (if any) remaining after deducting the total arrears amount from the normal taxable income of the current year.
Eligible lump sum means a lump sum payment of eligible income.
Eligible income is defined in subsection 159ZR(1) of the ITAA 1936. Under paragraph (c) of the definition, a payment covered by section 12-80 or 12-120 in Schedule 1 to the Taxation Administration Act 1953 (TAA) is eligible income. Under paragraph (e) of the definition, eligible income includes a payment that is covered by Division 52, 53 or 55 of the ITAA 1997, but that is not exempt from income tax under that Division. A payment under a law of a foreign country that is similar to a payment covered by paragraph (e) is also eligible income (paragraph (f) of the definition).
Section 12-80 in Schedule 1 to the TAA relates to a superannuation income stream and an annuity. As outlined above, your payment is not an annuity, therefore this provision does not apply in your circumstances. Section 12-120 in Schedule 1 to the TAA relates to compensation, sickness or accident payments and is also not relevant in your circumstances.
Division 52, 53 and 55 of the ITAA 1997 relates to certain pensions, benefits and allowances including payments under the Social Security Act 1991. Your life insurance benefit is not similar to any of the payments listed in these Divisions and is not regarded as eligible income under paragraph (f) of the definition in subsection 159ZR(1) of the ITAA 1936.
In your case your lump sum payment is not regarded as eligible income under subsection 159ZR(1) of the ITAA 1936.
As you have not received 'eligible income' for the lump sum payment in arrears tax offset purposes, you are not entitled to a tax offset under section 159ZRA of the ITAA 1936.