1 Is the lump sum payment from the Pension Scheme assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
1 Yes. Question 2 Are the back payments and ongoing pension payments assessable as foreign sourced pension income with no undeducted purchase price (UPP)? Answer 2 Yes. The pension is not derived directly from employment, but from the cessation of such employment. This ruling applies for the following period : Year ended 30 June 20YY The scheme commences on: 1 July 20YY
From 20YY, you worked part-time for a healthcare system in Country A. From 20YY, you became full-time. All employee contributions were deducted before foreign tax was paid. You made no after-tax or voluntary contributions. In 20YY, you migrated permanently to Australia, and became an Australian resident for tax purposes. On DD MM 20YY, after you turned 60 you applied for the pension. On DD MM 20YY, you received the pension as a lump sum. The Country A pension entitled you to an annual pension paid monthly from the date the pension benefit age was reached onwards. In addition to your annual pension, you also receive a one-off pension lump sum of 3 times your annual pension. You also received some back payments dated back to MM 20YY and ongoing pension payments made monthly in arrears. Your lump sum payment of $AXX.XX was credited to your Australian bank account. Your annual pension is XX.
Income Tax Assessment Act 1997 section 6-5 Income Tax Assessment Act 1997 section 6-20 Income Tax Assessment Act 1997 section 305-70 Income Tax Assessment Act 1997 section 305-75
Issue Assessable income - foreign pension - lump sum payment Question 1 Is the lump sum payment from the Pension Scheme assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? Summary Yes. Question 2 Are the back payments and ongoing pension payments assessable as foreign sourced pension income with no undeducted purchase price (UPP)? Summary Yes. The pension is not derived directly from employment, but from the cessation of such employment. Detailed reasoning Tax treatment for the Lump sum payments received from overseas entity Section 305-70 of the Income Tax Assessment 1997 (ITAA 1997) provides that where the taxpayer receives a lump sum from a foreign superannuation fund more than six months after becoming an Australian resident, they include the 'applicable fund earnings' of the lump sum (if any) in their assessable income. Applicable fund earnings are worked out under section 305-75 of the ITAA 1997. Assessable income - general Subsection 6-5(1) of the Income Tax Assessment 1997 (ITAA 1997) provides that assessable income includes 'income according to ordinary concepts', which is called ordinary income.
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a taxpayer who is a resident of Australia includes ordinary income derived directly or indirectly from all sources whether in or out of Australia during the income year. However, if an amount is exempt income, it is not included in the assessable income of a taxpayer (section 6-15 of the ITAA 1997). Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of an Australian resident includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists those provisions about assessable income. Included in this list is section 27H of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income. This section states that annuities first payable on or after 1 July 1983 are included in the assessable income of the taxpayer, excluding the undeducted purchase price if the annuity was purchased.
Income according to ordinary concepts 'Income according to ordinary concepts' is not defined within the legislation; however, case law discussion has provided the following characteristics: • It is received periodically • It is earned as a result of work performed • It is expected • It is relied upon • It replaces income or has the characteristics of income Pension income is ordinary income assessable under subsection 6-5(2) of the ITAA 1997. An amount received as a pension is ordinary income and forms part of your assessable income in the year it is received. Accordingly, as you are an Australian resident for tax purposes, your assessable income will include your pension income from the Country A Pension Scheme. Double taxation agreements 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 tax treaty 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). The double taxation agreement (DTA) between Australia and Country A includes the following about the taxation of pensions: Article 17 Pensions and annuities 1. Pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State. 2. The term "annuity" means a stated sum payable periodically to an individual at stated times during life or during a specified or ascertainable period of time under an obligation to make the payments in return for adequate and full consideration in money or money's worth. Foreign currency conversion The foreign currency translation rules for lump sum transfers from foreign superannuation funds are explained in ATO Interpretative Decision ATO ID 2015/7: Foreign currency translation rules in working out 'applicable fund earnings' under section 305-75 of the ITAA 1997
. The Commissioner determined that the exchange rate at which it is reasonable to translate amounts into Australian currency for the purposes of section 305-75, is the exchange rate applicable at the time of receipt of the relevant superannuation lump sum. This will be the time when the taxpayer transfers their benefits to Australia. Application to your situation You applied to commence your Country A pension when you turned 60 on DD MM 20YY. On DD MM 20YY you received a lump sum retiring allowance and your first pension payment. You will continue to receive monthly pension payments. The contributions to the foreign pension were made prior to tax and therefore no tax has been deducted from the pension contributions. As outlined above, foreign pension amounts are assessable as ordinary income under subsection 6-5(2). The DTA between Country A and Australia provides that foreign pension amounts are assessable only in Australia if you are an Australian resident when you receive those amounts. The lump sum amount is not capital in nature; therefore, the capital gains tax provisions will not apply in relation to the taxation treatment of the lump sum amount.
There is no offset, rebate, deduction and/or any legislation that would enable you to not be assessed on all, or any part, of the lump sum amount. Therefore, the lump sum amount you have received from the foreign pension will be under subsection 6-5(2) and needs to be included in your income tax return for the ruling period, being the income year in which you received the lump sum amount. Note: Information about how to report foreign pensions when lodging your tax return using myTax can be viewed on the following web page on our web site ato.gov.au by searching for the Quick Code (QC) number or the web page title: QC 104188 myTax 2025 Foreign pensions and annuities Instructions on how to report foreign source income are provided in the instructions for the supplement income section of the 2025 tax return, with information about reporting foreign pensions provided under heading 'Part B' on the following web page: QC 104266 20 Foreign source income and foreign assets or property 2025