Edited version of private ruling

Authorisation Number: 1011514910429

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Ruling

Subject: Foreign income - Pension

Question 1

Is the pension you receive from the foreign Government assessable in Australia?

Answer

Yes.

Question 2

Are the periodic education payments you receive on behalf of your minor children form part of your assessable income?

Answer

No.

Question 3

Are the periodic education payments paid to you on behalf of your minor children assessable to you as trustee?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You are an Australian and foreign citizen.

You are an Australian resident for taxation purposes.

You arrived in Australia.

You are currently receiving a pension from the foreign Government.

Your children receive compensation as dependents of the deceased.

Your children are under the age of eighteen.

You as a trustee receive an education allowance from a private life insurer for your children and you are currently paying tax on this amount in the foreign country.

You receive quarterly payments on behalf of your children.

You advised that you use the money to maintain your children.

You did not pay any income tax in the foreign country for the pension.

Life Insurance settlement cannot be resolved as the court case is still pending to ascertain the terms and amount of payout. You will resubmit a new private ruling application for this issue at a later stage.

Australia has a tax treaty with the foreign country.

Relevant legislative provisions

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

Income Tax Assessment Act 1997 Subsection 6-5(4).

Income Tax Assessment Act 1936 Section 98.

Income Tax Assessment Act 1936 Subsection 102AE(2)(a).

Income Tax Assessment Act 1936 Subsection 100(2).

International Tax Agreements Act 1953.

Reasons for decision

Foreign pension

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

Retirement pensions are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

However, in determining liability to Australian tax on foreign sourced income, it is relevant to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953.

Australia has a tax treaty with the foreign country (the foreign country Agreement) which operates to avoid the double taxation of income received by Australian and the foreign country residents.

The relevant article of the foreign country Agreement provides that any pension paid by, or out of funds created by foreign or a political subdivision or a statutory body or local authority thereof to an individual in respect of services rendered to the foreign country will be taxable only in the foreign country. However, the relevant article of the foreign country Agreement provides that such pensions will be taxable only in Australia if the individual is a resident of, and a citizen of, Australia.

In your case you are a resident and a citizen of Australia for income tax purposes. Accordingly your pension from the foreign country is taxable only in Australia as Australia has the sole taxing right as per the relevant article of the foreign country Agreement. The pension is therefore included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Periodic education payment

The facts of your case show that your children have an entitlement to receive payments same as stated under the Workers compensation Act 1987 (WCA 1987) to the compensation payments due to the death of their parent.

Compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. (Federal Commissioner of Taxation v. Inkster 89 ATC 5142, 20 ATR 1516; Tinkler v. Federal Commissioner of Taxation 79 ATC 4641, 10 ATR 411; Case Y47 91 ATC 433, 22 ATR 3422).

The wording of the section of the WCA 1987 under which the benefits are paid, indicates that the payments are in the nature of compensation for loss of income or income support.

Therefore, the compensation payments in the form of education payment you have received on behalf of children are in the nature of ordinary income.

However, the question arises as to whether you are assessable on this income.

Taxation Determination TD 92/133 states that compensation paid under a federal workers compensation act is assessable to the child of the deceased employee and not the child's parent or guardian. Even if the parent actually receives the payments, they are a constructive receipt of the child and therefore deemed to be derived by the child in accordance with subsection 6-5(4) of the ITAA 1997.  

TD 92/133 is not confined to payments made under federal legislation but can also be applied to other accident or compensation legislation that applies to dependent children of a deceased parent.

Therefore, in your case, the wording of section 25 of the WCA 1987 states that the employer shall pay a weekly amount in respect of a dependent child. Section 31 of that WCA 1987 provides that the compensation will be paid to the surviving spouse through the construction of a trust.

As it is clear that the compensation payments are paid for the benefit of the children concerned, and that they are paid to you on behalf of the children, it is considered that the payments are not derived by you in your own right.

Therefore, the quarterly benefits paid to you on behalf of children are income and are not assessable to you under section 6-5(2) of the ITAA 1997. You do not need to show this income in your income tax return.

Whether the compensation amounts are assessable to you as trustee

As your children are under the age of 18 and you are the trustee on their behalf, you are assessable on the income under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936). You are not taxed personally but in the capacity of trustee.

The payments are considered to be employment income under paragraph 102AE (2)(a) of the ITAA 1936 and therefore the income is taxed at ordinary tax rates. This means the income is taxed at the rates applicable to individual taxpayers with the benefit of a tax-free threshold that applies for residents for the full year.

A trust tax return will need to be lodged by the trustee showing a beneficiary's share of trust income to which the trustee is liable to be assessed on under subsection 98(1) of the ITAA 1936.

Where a trustee is assessed under subsection 98(1) of the ITAA 1936 and a beneficiary receives no other income apart from their share of trust income, the beneficiary is not required to lodge a personal income tax return as the trustee will pay tax on their behalf. No tax will be payable if the total income from this source for the year is below the tax threshold that is $6000 for each child.

If the beneficiary receives income from other sources, for example salary and wage income, the beneficiary will be required to lodge an income tax return and declare all income derived for the income year (including any trust income). To prevent double taxation, subsection 100(2) of the ITAA 1936 allows a credit for tax already paid by the trustee on behalf of the beneficiary.

Hence, you as a trustee are liable to declare the quarterly education payment in the trust return. You are required to pay tax as the income for each child is more than $6000.

Note

To lodge a trust return, you need to apply for the trust tax file number. For more information please visit our web site www.ato.gov.au

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