Edited version of private advice

Authorisation Number: 1051628320566

Date of advice: 5 February 2020

Ruling

Subject: Foreign Sourced Income

Question

Is the taxpayer entitled to disregard income received in a lump sum he earned while a non-resident of Australia for tax purposes, but received while a resident of Australia for tax purposes in a later year?

Answer

No

Question

If the above is not-applicable, is the taxpayer entitled to split the income received in a lump sum payment (pension payment) across the relevant years the income would have been assessable if the payment had not been delayed in payment by a third party?

Answer

Yes

Question

Is the taxpayer's foreign pension payment subject to an undeducted purchase price deduction in the income tax return, for either the lump sum amount or the stream of pension payments made on a monthly basis?

Answer

No

This ruling applies for the following period:

30 June 2018

The scheme commences on:

1 July 2017

Relevant facts and circumstances

The taxpayer worked for a corporation as a non-resident of Australia for several years. During this period the taxpayer worked in overseas countries.

As part of their employee entitlements, the taxpayer received pension contributions to their employer's fund (the foreign fund). These pension payments accumulated over a period of time and were to be paid to the taxpayer upon retirement from the corporation.

The foreign fund is subject to the laws of a foreign country.

The document '... Your Pension Fund,' accessed from the foreign fund's website, indicates the taxpayer's benefits in the foreign fund are only payable upon retirement.

The taxpayer became entitled to receive the monthly pension payments on during the 200X-0X income year. The amount received is based on their final salary and years of service.

Due to unanticipated delays, the accumulation of pension payments was paid to the taxpayer during the 2017-18 financial year. This represents a period of 12 years past when the taxpayer would have been entitled to the first instalment of the pension payment.

The taxpayer now receives a pension per month paid as part of their non-contributory pension.

The taxpayer's taxable income for the 2017-18 income year, excluding the pension income, was a certain amount.

The taxpayer was an Australian resident for tax purposes on the day he became eligible to receive the pension payments.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 27H

Income Tax Assessment Act 1936 Section 159ZRA

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Section 10-5

International Tax Agreements Act 1953 Section 4

Reasons for decision

Question 1

Ordinary income and statutory income

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

Pensions are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

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 ITAA 1997 where there are inconsistent provisions (except in some limited situations).

As the foreign country does not levy direct taxes, there are no double tax agreements between the foreign country and other nations.

As the taxpayer is a resident of Australia for taxation purposes, and was a resident at the time they became entitled to receive the pension, the lump sum pension payment is assessable in Australia under subsection 6-5(2) of the ITAA 1997 and is included in the taxpayer's income tax return.

Question 2

Section 159ZRA of the ITAA 1936 operates to allow a rebate of tax for lump sum payment in arrears in respect of certain income received on or after 1 July 1986. The rebate provided is available for foreign pensions. The rebate is designed to address the problem of more tax being payable in the year of receipt of the lump sum payment in arrears than would have been payable if the lump sum had been taxed in each of the years in which it accrued.

Broadly, the rebate is calculated as the difference between the extra amount of tax payable in the year of receipt because of the lump sum and the amount of tax that would have been payable if the lump sum had been taxed as it accrued.

To be eligible for the rebate, the amount of income in arrears must not be less than 10% of the taxpayer's taxable income in the year of receipt after deducting the income in arrears.

The taxpayer's taxable income for the 2017-18 year, excluding the pension income, was a certain amount.

In this case, the taxpayer will be eligible for the arrears rebate, as they received a total net lump sum in the 2017-18 income year which is greater than 10% of his taxable income.

Question 3

Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) operates to include in assessable income the amount of any pension derived by a taxpayer during a year of income reduced by the annual deductible amount.

The deductible amount is deemed to be a return of part of the taxpayer's contribution towards the purchase of the pension.

The deductible amount is calculated based on the undeducted purchase price (UPP) of the taxpayer's pension.

The UPP is the amount contributed towards the purchase price of the pension for which the taxpayer did not claim, and was not eligible to claim, a tax deduction in Australia. Contributions made by an employer or by another person under an agreement to which the employer was a party, cannot form part of the UPP of the pension.

In this case, the evidence shows that the taxpayer did not make any personal contributions to the foreign fund. Payments to the fund were made by the taxpayer's foreign employer.

As the taxpayer did not make any personal contributions to the purchase of their pension the foreign fund, they are not entitled to a deductible amount of UPP in respect of this policy.