Edited version of private ruling

Authorisation Number: 1011478740541

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Ruling

Subject: Foreign compensation payments

Question

Are your foreign compensation monthly payments assessable income in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commenced on

1 July 2006

Relevant facts

You are an Australian resident for tax purposes.

You were a foreign citizen and working overseas in country A.

While working overseas, you sustained a serious work-related injury which eventually resulted in an impairment.

The foreign law mandates compulsory coverage for workplace injuries.

As a result of your work-related injury, you were paid workers compensation on a monthly basis.

You did not have the option of obtaining a lump sum commutation.

Initially, partial loss of earnings compensation was paid on a monthly basis. Such compensation awards are tax exempt in the overseas country. They are paid at X% of the deemed loss of earnings.

The Y% deduction represents various tax factors. These deductions are standardized based on gross average earnings. That is, the amount is the same regardless of the worker's tax status. It is not intended to reflect the personal circumstances of the worker.

A few years ago, the loss of earnings award ceased and a monthly award commenced.

Once the percentage of disability was determined, it is applied to the worker's average earnings and the pension is X% of the amount so determined.

The award is indexed to W% below the Consumer Price Index (CPI) and at no more than Z% per annum.

The award payable is governed by the statutory maximum in effect at the date of injury.

The awards are also tax exempt in the overseas country.

There are no individual components of the payment.

There is no component for pain or suffering.

The payment is paid because of the impact of the injury on your ability to accumulate retirement income, less Y%.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

International Tax Agreements Act 1953

Reasons for decision

Summary

Your monthly foreign compensation payments are regarded as assessable income in Australia. The regularity of the payments and the fact they are intended as an income supplement gives them the character of ordinary assessable income.

Detailed reasoning

Compensation payments

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (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.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. Characteristics of ordinary income that have evolved from case law include receipts that:

1. are earned,

2. are expected,

3. are relied upon, and

4. have an element of periodicity, recurrence or regularity.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In Dixon's case it was found that even if the receipts are not directly attributable to employment or services rendered, the expected regular periodical payments had the character of ordinary income.

Pensions and other living allowances may not be in connection with employment, yet are generally regarded as ordinary assessable income.

In FC of T v. Blake (1984) 75 FLR 315, the characteristics of the payments in question were looked at to decide if they were assessable income. The periodical nature of the payment, the recipient's reliance or otherwise on the payment for regular expenditure on himself and his dependents, led to the decision that the payments were assessable income.

In FC of T v. The Myer Emporium Ltd 87 ATC 4363, the Full High Court said (at p 4370):

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind.

Another basic principle is that the character of the receipt must be determined from the point of view of the recipient and not from the standpoint of the payer or some other person.

In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In your case, you are receiving monthly compensation payments. The payments will provide you with an income support which you will be able to rely on for your day to day living expenses. The regularity of your payments and the full circumstances surrounding your case indicate an income nature. The monthly payment is expected and relied upon.

Your monthly compensation payments have the major characteristics of ordinary income identified above and the payments are assessable under subsection 6-5(2) of the ITAA 1997.

Some foreign payments, for example, certain war time compensation payments are specifically exempted under the ITAA 1997. Your award is not among those listed as exempt. As the payments are not excluded by the operation of Australian tax laws it is then necessary to look at the terms of any relevant international agreement between Australia and country A.

The International Tax Agreements Act 1953 (Agreements Act) contains the tax treaty between Australia and country A (the Agreement). The Agreement operates to avoid the double taxation of income received by Australian and country A residents.

Subsection 4(1) of the Agreements Act provides that the Agreements Act incorporates the ITAA 1997 and those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited situations that are not relevant in the present case).

The relevant article of the Agreement provides that pensions and annuities arising in country A and paid to a resident of Australia may be taxed in Australia.

The term 'pension' is not defined in the Agreement. The Agreement provides that any term not defined shall, unless the context otherwise requires, have the meaning that it has under the law of that State concerning the taxes to which the Agreement applies.

In relation to the meaning of the term 'pension', Taxation Determination TD 93/151, which deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's tax treaties, states at paragraph 1:

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 Australia Ltd v. FCT (1993) 25 ATR 183. His Honour concluded that the essential characteristic of a pension is that there be periodical payments.

Your compensation payments fall within the Macquarie Dictionary meaning of 'pension' in that they are a fixed periodical payments made in consideration of injury or loss sustained. Furthermore, the payments have the essential characteristic of a pension as they are periodical payments made monthly.

The compensation payments made to you from country A are therefore a pension for the purposes of the Agreement. As such they may be taxed in Australia.

As stated above, your compensation payments are ordinary income and are included in your assessable income under subsection 6-5(2) of the ITAA 1997.

There are no provisions in the ITAA 1997 that make your compensation payments exempt income in Australia. Therefore the compensation payments form part of your assessable income and should be declared on your relevant tax returns.

The fact that the formula for determining the amount you receive includes a tax factor does not alter the assessability of your payments in Australia. Australia is not bound by overseas law and the fact that workers compensation payments are exempt from tax in country A is not relevant when determining its assessability in Australia.

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