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Is the arrears of pension from the United Kingdom (UK) received as a lump sum by a resident taxpayer assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The arrears of pension from the UK received as a lump sum by a resident taxpayer is assessable under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer received a lump sum payment from the UK.

The lump sum payment represents arrears of pension over a long period of time.

Subsection 6-5(2) of the 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.

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 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). The UK Agreement operates to avoid the double taxation of income received by Australian and UK residents.

Paragraph (1) of Article 14 of the UK Agreement provides that any pension derived from the UK by an Australian resident will be exempt from tax in the UK.

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

Accordingly, the assessable income of the taxpayer will include the arrears of pension from the UK received as a lump sum under subsection 6-5(2) of the ITAA 1997.