Assessability of a lump sum withdrawal payment received by resident from a Japanese superannuation fund

Is a lump sum withdrawal payment from a Japanese superannuation fund paid to a taxpayer, who is a resident of Australia for income tax purposes, included in assessable income under subsection 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

No. The lump sum withdrawal payment from a Japanese superannuation fund received by the taxpayer is not included in assessable income under subsection 6-10(4) of the ITAA 1997 as section 27CD of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the taxpayer's assessable income does not include the amount.

The taxpayer lived in Japan for an extended period of time and during this period was a non-resident of Australia for tax purposes.

The taxpayer contributed to a pension fund while working in Japan.

The fund is an eligible non-resident non-complying superannuation fund within the meaning of section 27A of the ITAA 1936.

The taxpayer subsequently returned to Australia and became a resident of Australia for tax purposes at that time.

Within 6 months of the taxpayer's return to Australia, the taxpayer received a payment from the Japanese fund.

The payment is described as a 'Lump Sum Withdrawal Payment'. This is a payment that is made to a person who has contributed to the fund for at least 6 months and has since left Japan.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts which are not ordinary income but are included in assessable income by another provision. Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia.

However, subsection 6-15(1) of the ITAA 1997 provides that if an amount is not ordinary income and is not statutory income, it is not assessable income. The lump sum withdrawal payment received by the taxpayer is not ordinary income.

Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list are sections 27A to 27H of the ITAA 1936 which provide that eligible termination payments are included in assessable income.

Section 27CD of the ITAA 1936 provides that if an exempt non-resident foreign termination payment is made in relation to a taxpayer, the taxpayer's assessable income does not include that payment. Such payments are excluded under paragraph (ka) of the definition of 'eligible termination payment' in subsection 27A(1) of the ITAA 1936 and therefore are not statutory income.

The meaning of an 'exempt non-resident foreign termination payment' is defined in subsection 27A(1) of the ITAA 1936 which covers two types of payments.

The first type of payment under paragraph (a) of the definition does not apply as the payment was made because the taxpayer left Japan and not in consequence of the termination of the taxpayer's employment.

The second type of payment under paragraph (b) of the definition contains four conditions that must be satisfied for a payment to be an 'exempt non-resident foreign termination payment': (i) the payment is made from an eligible non-resident non-complying superannuation fund within 6 months after the taxpayer became a resident of Australia; (ii) had the fund been a superannuation fund, the payment would, apart from paragraphs (ka) and (ma) of the definition of "eligible termination payment" in subsection 27A(1), have been an eligible termination payment; (iii) the period to which the payment relates does not include any period other than a period in which the taxpayer was a non-resident or a period between the time when the taxpayer became a resident and the time when the taxpayer received the payment; (iv) the benefit does not exceed the amount that was properly payable out of the fund to the taxpayer at the time when the payment was made;

The first condition is satisfied as the fund is an eligible non-resident non-complying superannuation fund and the taxpayer received the payment within 6 months of becoming a resident of Australia.

As the payment is from an eligible non-resident non-complying superannuation fund it cannot be an eligible termination payment because paragraph (ma) of the definition of eligible termination payment in subsection 27A(1) of the ITAA 1936 expressly excludes it.

However, had it not been for paragraph (ma) and had the fund been a superannuation fund as defined under subsection 27A(1) of the ITAA 1936, the payment would have been an eligible termination payment under paragraph (b) of the definition of 'eligible termination payment' in that subsection. None of the exclusions in that paragraph apply to the taxpayer. Therefore, the second condition is satisfied.

As the period to which the payment relates only includes the period when the taxpayer was a non-resident, the third condition is satisfied.

The last condition is satisfied as the payment does not exceed the amount properly payable to the taxpayer at the time the payment was made.

Since all the conditions are satisfied, the payment received by the taxpayer is an exempt non-resident foreign termination payment.

In determining the liability to Australian tax on foreign sourced income received by a resident taxpayer 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 1936 and the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule 6 to the Agreements Act contains the double tax agreement and the protocol between Australia and Japan (the Japanese Agreement). The Japanese Agreement operates to avoid double taxation of income received by Australian and Japanese residents.

The Japanese Agreement does not contain an Article dealing with payments of the kind received by the taxpayer nor does it contain an Article dealing with income not expressly mentioned in the Japanese Agreement.

As the lump sum withdrawal payment is an exempt non-resident foreign termination payment, the payment is not included in assessable income under section 27CD of the ITAA 1936 and is excluded from the definition of an eligible termination payment in subsection 27A(1) of the ITAA 1936.

Accordingly, the payment is not included in the taxpayer's assessable income under subsection 6-10(4) of the ITAA 1997. The payment is neither statutory income nor ordinary income.