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Edited version of private ruling

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Ruling

Subject: Assessability of foreign compensation payments

Are the weekly compensation payments you receive from overseas assessable in Australia?

Yes.

This ruling applies for the following period

1 July 2009 to 30 June 2010

The scheme commences on

1 July 2009

Relevant facts and circumstances

You and your family recently moved to Australia from overseas.

You are an Australian resident for tax purposes.

You have been in receipt of weekly compensation from an overseas provider for a number of years.

Prior to moving to Australia your weekly compensation payment was taxed overseas.

The payments will cease in the near future.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

International Tax Agreements Act 1953

Summary

The International Tax Agreements Act 1953 (Agreements Act) contains the tax treaty between Australia and the overseas country.

It states that pensions (including government pensions) and annuities sourced in that country and paid to a resident of Australia are taxable only in Australia.

Therefore, the payments you receive are ordinary income and assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

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.

Weekly compensation payments are considered to meet the ordinary definition of income, as they are regular periodic receipts that would be expected and generally relied upon.

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 tax treaty contained in the Agreements Act.

The Agreements Act contains the tax treaty between Australia and the foreign country. The agreement operates to avoid the double taxation of income received by Australian and foreign residents.

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 Agreement provides that pensions (including government pensions) and annuities sourced in that country and paid to a resident of Australia are taxable only in Australia.

The term 'pension' is not defined in the Agreement. An article of the Agreement provides that any term not defined in the Agreement shall, unless the context otherwise requires, have the meaning which it has under the law of that State from time of force to time in force relating to 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:

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 weekly.

The compensation payments made to you from the foreign country are therefore a pension for the purposes of the Agreement.

Consequently the compensation payments received in your name are ordinary income and are included in your assessable income under subsection 6-5(2) of the ITAA 1997.

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