ATO Interpretative Decision

ATO ID 2002/759

Income Tax

• This ATO ID was amended by replacing the reference to article 19 to the tax treaty between Australian and New Zealand with Article 18 contained in the new tax treaty which took effect from 19 March 2010.
  This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Are monthly payments received by an Australian resident taxpayer under a New Zealand (NZ) income protection policy assessable income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The monthly payments received by an Australian resident taxpayer under a NZ income protection policy are assessable income under section 6-5 of the ITAA 1997.

Facts

The taxpayer emigrated from NZ and is now a resident of Australia for taxation purposes.

The taxpayer holds an NZ income protection policy. This policy provides for regular income replacement payments if the holder becomes permanently disabled.

The taxpayer became permanently disabled and receives monthly income replacement payments under the NZ income protection policy.

Reasons for Decision

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

Regular income replacement payments under an income protection policy have the character of ordinary income (ATOID 2002/175).

The payments the taxpayer receives from the income protection policy are a substitute for salary income that they would have received had they not become disabled. As such, they are assessable under subsection 6-5(2) of the ITAA 1997.

In determining liability to tax on foreign sourced income received by an Australian resident taxpayer it is necessary to consider not only the income tax laws but also any applicable double tax agreement (DTA) 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. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 4 to the Agreements Act contains the DTA between Australia and NZ (the NZ Convention). The NZ Convention operates to avoid the double taxation of income received by Australian and NZ residents.

It is necessary to establish how the payments received by the taxpayer are categorised for the purposes of Australia's DTAs. Taxation Determination TD 93/151 deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's DTAs.

Taxation Determination TD 93/151 provides at paragraph 1:

' The term "pension" is not defined in any of the DTAs and therefore takes the meaning it has under domestic law. A pension is defined in the Macquarie Dictionary as "1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. an allowance or annuity." The meaning of the term "pension" was considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.'

Paragraph 1 of TD 93/151 goes on to provide that the Comcare payments are fixed periodical payments and that they are pensions within the ordinary meaning of that term and therefore fall within the Pensions Articles for the purposes of Australia's DTAs.

While the payments the taxpayer is receiving are not paid by Comcare, they are similar to Comcare payments in that they are fixed periodical payments made in consideration of injury or loss sustained. As such the payments the taxpayer receives are considered to be a pension for the purposes of the NZ Agreement.

Article 18 of the NZ Convention deals with the taxation treatment of pensions. It provides that pensions (including government pensions) sourced in NZ and paid to a resident of a Australia are taxable only in Australia.

The monthly payments received under the NZ Income Protection Policy by the Australian resident taxpayer are a pension for the purposes of the NZ Convention and are taxable in Australia. Accordingly, the payments received by the taxpayer are ordinary income and are therefore assessable under section 6-5 of the ITAA 1997.

Year of income:  Year ended 30 June 2000 Year ended 30 June 2001 Year ending 30 June 2002

Legislative References:
Income Tax Assessment Act 1997
   section 6-5
   subsection 6-5(2)

Case References:
Tubemakers of Aust Ltd v. FC of T
   93 ATC 4207
   (1993) 25 ATR 183

Related Public Rulings (including Determinations)
Taxation Determination TD 93/151

Related ATO Interpretative Decisions
ATO ID 2002/175

Keywords
Accident & disability insurance
Assessable income
Double tax agreements
Foreign income
Foreign pension
Foreign pension income
Income protection insurance
New Zealand

Siebel/TDMS Reference Number:  DW403624

Business Line:  Small Business/Individual Taxpayers

Date of publication:  31 July 2002

ISSN: 1445-2782