Edited version of your private ruling

Authorisation Number: 1012553546737

Ruling

Subject: Foreign income

Question and answer

Is the Country Y compensation payment you receive assessable in Australia?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commenced on:

1 July 2013

Relevant facts and circumstances

You are a resident of Australia for taxation purposes.

You are receiving periodic compensation payments from a Country Y Government department. These payments are expected to continue until a later date.

This payment is tax free in Country Y.

Relevant legislative provisions:

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

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Reasons for decision

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.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y agreement (the agreement) is listed in section 5 of the Agreements Act.

The agreement between Australia and Country Y operates to avoid the double taxation of income received by residents of Australia and Country Y.

Article xx of the Country Y agreement considers the tax treatment of pensions, annuities, alimony and child support. It states:

(1) Subject to the provisions of Article xy (Governmental remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

(2) Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned State.

(3) Annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that State.

(4) The term "pensions and other similar remuneration", as used in this Article, means periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.

(5) The term "annuities", as used in this Article, means stated sums paid periodically at stated times during life, or during a specified or ascertainable number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered or to be rendered).

(6) Any alimony or other maintenance payments, including payments for the support of a minor child, arising in one of the Contracting States and paid to a resident of the other Contracting State, shall be taxable only in the first-mentioned State.

In your case the payment you are receiving from Country Y government department does not fall within one of the provisions listed above and therefore article xx does not apply.

Article xy considers the tax treatment of Governmental remuneration. It states:

Wages, salaries, and similar remuneration, including pensions, paid from funds of one of the Contracting States, of a state or other political subdivision thereof or of an agency or authority of any of the foregoing for labour or personal services performed as an employee of any of the above in the discharge of governmental functions to a citizen of that State shall be exempt from tax by the other Contracting State.

The payment you receive does not fall under Article xy as it is not salary or wages or other similar remuneration paid to you for employment.

Article xz of the agreement considers the tax treatment of income not expressly mentioned. It states:

(1) Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Convention shall be taxable only in that State.

(2) However, if such income is derived by a resident of one of the Contracting States from sources in the other Contracting State, such income may also be taxed in the State in which it has its source.

As your compensation payment is not expressively mentioned in any other article of the agreement, it is covered under Article xz. Accordingly, your compensation payment is taxable only in Australia.

As stated earlier, subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income).

To determine what is ordinary income it is necessary to look at case law. From previous court cases, the following elements signify that a receipt is ordinary income:

It is earned

· It is expected

· It is relied upon, and

· It has an element of periodicity, recurrence or regularity.

 In your case, the payment you receive from the Country Y government department is ordinary income as the payment is expected (you have been informed that these payment will continue until a later date), regular (the payments are paid periodically) and relied upon by you (they form part of your income). Accordingly, as you are a resident of Australia for tax purposes, this income will be assessable.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).