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Edited version of private advice

Authorisation Number: 1012631156277

Ruling

Subject: Compensation payment

Question 1

Are the compensation payments you receive from an overseas annuity assessable?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You became a resident of Australia for taxation purposes in 20XX.

You purchased a lifetime annuity in 1996 from a foreign superannuation fund.

You receive regular payments from the annuity following the maladministration of the foreign superannuation fund.

The foreign government set up the Scheme to help cover the losses incurred by the policy holder.

You received the first of the compensation payments from the foreign government in late 20YY and will continue to receive the payments for life.

Relevant legislative provisions

Income tax Assessment Act 1997 Section 6-5

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

Income tax Assessment Act 1997 Subsection 6-5(4)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. 

Other characteristics of income that have evolved from case law include receipts that:

Payments of annuity proceeds are ordinary income as they are relied upon by you, expected by you and are received on a regular basis.

Receipts that are not annuity proceeds , but are paid as a substitute for annuity proceeds that would normally have been earned, expected and relied upon by a taxpayer, are also assessable as ordinary income.

The general principle is that such payments take on the character of the annuity proceeds they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income.

In your case the compensation you receive from the Scheme compensates you for the loss you have incurred due to the maladministration of the fund and the reduction in the proceeds you would have received.

As the payments are compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the year that you received the payments.

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