Edited version of private advice

Authorisation Number: 1012632231626

Ruling

Subject: Foreign compensation payments

Questions and answers

1. Were you a resident of Australia for tax purposes at the time you received the foreign lump sum compensation payment?

Yes.

2. Were you a temporary resident of Australia for tax purposes at the time you received the foreign lump sum compensation payment?

Yes.

3. Is the foreign lump sum compensation payment you received assessable in Australia?

No.

4. Are the foreign weekly compensation payments you receive assessable in Australia?

No.

This ruling applies for the following period

Year ending 30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You were born in country X and are a citizen of country X.

You have a spouse who is a citizen of country X.

You and your spouse arrived in Australia with the intention of staying in Australia permanently.

You and your spouse entered Australia with special category temporary visas.

Neither you nor your spouse is a citizen or permanent resident of Australia.

You suffered a work related accident in country X several years before arriving in Australia.

You made a claim on your employer in country X which was eventually settled after a court hearing.

You received a lump sum payment in settlement of your claim.

The payment you received represented the back payment of weekly compensation payments equating to Y% of your previous wages over a period of several years.

The payment you received represented compensation for lost wages and no part of the amount you received related to compensation for accident or injury.

No tax was withheld from the lump sum payment in country X.

You are receiving weekly payments representing X% of your previous wages and tax is being withheld from these payments in country X.

The weekly payments you receive represent compensation for lost wages and no part of these payments relate to compensation for accident or injury.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(1)

Income Tax Assessment Act 1997 subsection 6-5(4)

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 section 768-915

Income Tax Assessment Act 1997 section 995-1

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Reasons for decision

Residency

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia.  However, where you are a foreign resident, your assessable income includes only income derived from an Australian source. 

The terms 'resident' and 'resident of Australia' are defined within the tax provisions which provide four tests to ascertain the residency status of an individual.

Relevant to your situation is the 'resides' test of residency which is discussed in Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia (TR 98/17).

Paragraph 16 of TR 98/17 states that a migrant who comes to Australia intending to reside here permanently is a resident from arrival.

In your situation, you arrived in Australia with the intention of living here permanently. Therefore, you are a resident of Australia for tax purposes from when you arrived here.

Temporary resident rules

Where you are a resident of Australia for tax purposes and also meet the requirements to be a temporary resident, the following income will not be taxable in Australia:

• Income you derive from a foreign source if you are a temporary resident when you derive it, unless the income is remuneration from employment you perform overseas while you are a temporary resident (section 768-910 of the ITAA 1997).

• A capital gain you make from the disposal of an asset located in a foreign country (section 768-915 of the ITAA 1997).

Section 995-1 of the ITAA 1997 states that you are a temporary resident if:

• you hold a temporary visa granted under the Migration Act 1958;

• you are not an Australian resident within the meaning of the Social Security Act 1991; and

• your spouse is not an Australian resident within the meaning of the Social Security Act 1991.

Under the Social Security Act 1991, an Australian resident is generally a person who resides in Australia and is either an Australian citizen or the holder of a permanent resident visa.

In your case, you and your spouse are citizens of country X who arrived in Australia with temporary visas. You are not Australian citizens or the holders of permanent resident visas.

Therefore, you have been a temporary resident of Australia since you arrived here as you hold a temporary visa granted under the Migration Act 1958 and neither you nor your spouse are Australian residents within the meaning of the Social Security Act 1991.

Compensation payments

Subsection 6-5(1) of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts.

Characteristics of income that have evolved from case law include receipts that:

• are earned,

• are expected,

• are relied upon,

• have an element of periodicity, recurrence or regularity.

It follows that salary and wage payments or payments that are received in substitution for salary and wages are assessable income.

Subsection 6-5(4) of ITAA 1997 specifies that you are taken to have derived or received an amount of income as soon as it is applied or dealt with in any way on your behalf or as you direct.

Taxation Determination TD 93/58 Income tax: under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? provides that the receipt of a lump sum compensation or settlement payment will be assessable if the payment represents compensation for the loss of income.

In your case, you had a workplace accident in country X and subsequently received a lump sum payment which represented the back payment of weekly compensation payments equating to X% of your previous wages. You are also receiving weekly compensation payments from country X.

Therefore, the lump sum you received would usually be assessable in Australia in the financial year you received it as it represents compensation for the loss of income. Likewise, the weekly payments you receive would also usually be assessable income.

However, in your case, the temporary resident rules apply to exclude the lump sum and weekly compensation payments from being included in your assessable income, as they represent foreign income derived by a temporary resident. Although the lump sum payment represented weekly compensation payments, you did not receive the payment until you were a temporary resident.

The lump sum compensation payment is not taxable in Australia and the weekly compensation payments are not taxable in Australia as long as you remain a temporary resident.

Double tax agreement

In determining liability to Australian tax on foreign sourced income received by a resident it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

The double tax agreement or convention with country X (the convention) is listed in section 5 of the Agreements Act. The convention operates to avoid the double taxation of income received by residents of Australia and country X.

The taxation of compensation payments is not mentioned in any of the Articles of the convention; therefore, it is necessary to refer to Article YZ which deals with the taxation of items of income that are not specifically mentioned in other Articles of the convention.

Article YZ specifies that items of income of a resident of Australia, not dealt with in other Articles of the convention and arising in country X, will be taxable in Australia and may also be taxed in country X.

In your case, you are a resident of Australia who received a lump sum compensation payment from a country X source. You are also receiving weekly compensation payments from a country X source.

Although Australia has the right to tax the compensation payments under the convention, it will not do so as you are a temporary resident of Australia.

However, under the convention, country X may tax both the lump sum payment and the weekly payments should it wish to. In this regard, we note that country X tax is already being withheld from the weekly payments you receive.

Summary

The lump sum compensation payment is not taxable in Australia as you are a temporary resident of Australia.

The weekly compensation payments are not taxable in Australia as long as you remain a temporary resident.

The lump sum compensation payment and the weekly compensation payments may be taxed in country X under the double tax agreement with country X.

You may need to make enquiries with the country X tax authorities in regard to the taxation treatment of the lump sum payment in country X.

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