Private ruling: Assessable pension
Published: June 2014
Ruling period: Year ending 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Question and answer: | 1. Is the lump sum that you received assessable in Australia? | Yes. | 2. Is the lump sum payment that you received assessable in the year in which the payment was received? | Yes.

Relevant facts and circumstances: You received a lump sum from a foreign pension fund. The lump sum accrued over a number of years during which you elected not to take the pension. During this period you were in receipt of a part Australian age pension. Had you been in receipt of the foreign sourced pension, you would have been entitled to receive a reduced pension from Centrelink. After receiving the lump sum payment from your foreign pension fund you were required to repay to Centrelink amounts relating to the years the lump sum accrued over.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Section 27H | Income Tax Assessment Act 1997 Section 118-197

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997), provides that if you are an Australian resident, your assessable income includes all income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) provides for assessable income to include annuities and superannuation pensions. In your case, you received a lump sum from a foreign pension fund. The lump sum represents an accrued amount over a number of years where you elected not to take a pension. Payments of salary and wages, including pensions, are income according to ordinary concepts and are included as assessable income under section 6-5 of the ITAA 1997. | Detailed Reasoning - Double tax agreement: 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 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 XXXXX Agreement is listed in section 5 of the Agreements Act. The X Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The X agreement operates to avoid the double taxation of income received by residents of Australia and country X. An article of the X Agreement advises that pensions paid to a resident of Australia shall be taxable only in Australia. Therefore, the pension that you have received in the form of a lump sum will only be assessable in Australia under subsection 6-5(2) of the ITAA 1997 and of the X Agreement. | Detailed Reasoning - Lump Sum included in assessable income: Income amounts are generally included in the calculation of a taxpayer's taxable income in the year in which they are received. Section 6-5 of the ITAA 1997 requires an amount of ordinary income to be brought to account as assessable income when it has been derived. Taxation Ruling TR 98/1 Income tax: determination of income; receipts versus earnings , discusses the Commissioners view on the appropriate method of determining when income is derived under subsection 6-5(2) of the ITAA 1997 where income is earned in one tax year but received in another. Paragraph 42 of Tax Ruling TR 98/1, provides that salary and wages or other employment remuneration is assessable on receipts basis. This is irrespective of whether that income relates to a past or future income period. Therefore, a lump sum amount of assessable income in arrears will be included in a taxpayer's taxable income in the year in which it is received. As previously discussed payments of salary and wages, including pensions are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. Therefore pensions would be assessable on a receipts basis in accordance with TR 98/1. In your case, you received a lump sum payment for pension payments that you elected to defer over a number years. In applying the principles established in TR 98/1, the amount was received as a lump sum and therefore will be required to be included in your income tax return in full in the year the lump sum was received, under subsection 6-5(2) of the ITAA 1997.