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Edited version of private ruling
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Ruling
Subject: Assessability of compensation payments
Will the weekly compensation payments that you receive be assessable in Australia once you become a foreign resident of Australia for tax purposes?
No.
This ruling applies for the following period
Year ended 30 June 2011
The scheme commenced on
1 July 2010
Relevant facts
You arrived in Australia.
While in Australia you were employed by an Australian company.
As a result of your employment you incurred a work related injury.
As a result of the injury you are in receipt of weekly compensation payments.
The payments are a replacement for salary and wages.
Your employer's insurance company makes the compensation payments.
While in Australia you were a resident of Australia for tax purposes.
You are returning to a foreign country permanently. From this date, you will be a foreign resident for Australian tax purposes.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 6-5(3)
International Tax Agreement Act 1953
Reasons for decision
Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from Australian sources.
The loss of earnings payments are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to Australian tax in respect of Australian sourced income received by a foreign resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreement Act 1953 (the Agreements Act).
Schedule X to the Agreements Act contains the tax treaty between Australia and the foreign country (the Agreement).
Article xx of the Agreement provides:
Pensions (including government pensions) and annuities paid to a resident of one of the Contracting States shall be taxable only in that State.
Article y of the Agreement provides:
In the application of this Agreement by a Contracting State, any term not defined in this Agreement shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Agreement applies.
Taxation Determination TD 93/151 discusses the meaning of a 'pension' for tax treaty purposes in the context of workers compensation payments. Paragraph 1 of TD 93/151 states that a 'pension' is defined in The Macquarie Dictionary , 2001, 3rd edn, The Macquarie Library Pty Ltd, NSW (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 also considered by Hill J. in the Federal Court in Tubemakers of Australia v. FC of T 93 ATC 4207; (1992) 25 ATR 183 (Tubemakers ). His Honour concluded that the essential characteristic of a 'pension' is periodic payments.
Loss of earnings have the essential characteristic of a 'pension' as per Hill J. in Tubemakers and fall within the Macquarie dictionary definition of 'pension' as they are fixed periodic payments made in consideration of injury or loss sustained. Accordingly, periodic compensation payments of this type are a 'pension' for the purposes of Article xx of the Agreeement.
In your case, you will continue to receive compensation payments as a replacement of salary and wages once you return to the foreign country. As this income is considered to be a 'pension' and because you will no longer be a resident of Australia for tax purposes, the foreign country will have the sole taxing rights over your compensation payments as per Article xx of the Agreement.
Accordingly, once you return to the foreign country and become a foreign resident of Australia for tax purposes the compensation payments that you will receive will not be assessable in Australia.
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