1013080528482 | Legal database

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Edited version of your written advice

Authorisation Number: 1013080528482

Date of advice: 6 September 2016

Ruling

Subject: Lump sum compensation payment

Question and answer

Is the loss of earnings (LOE) lump sum in arrears payment you received assessable income in Australia?

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You are not a resident of Australia.

You are a resident of Country Y.

You were employed in your home country.

You were in an accident in Australia.

You submitted a claim for loss of earnings to the relevant authority in Australia.

You were paid a lump sum amount in the 2016 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(3)

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

International Tax Agreements Act 1953 Article 18

International Tax Agreements Act 1953 Article 3 (3)

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 includes ordinary income derived directly or indirectly from Australian sources.

The loss of earnings payments are ordinary income for the purpose 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, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates the Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one.

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 is listed in section 5 of the Agreements Act. The Country Y agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. It operates to avoid the double taxation of income received by residents of Australia and Country Y.

Article XX of the country Y agreement provides that pensions paid to a resident of one of the Contracting State shall be taxable only in that State. Therefore, pensions paid from Australia to a resident of Country Y shall be taxable only in Country Y.

Article X (X) of the Country Y agreement provides that any term not defined in the Agreement shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which this Agreement applies. The term ‘pension’ is not defined in the Country Y Agreement or in Australia’s domestic taxation law.

Taxation Determination TD 93/151 discusses the meaning of a ‘pension’ for tax treaty purposes. Paragraph 1 of TD 93/151 states that a ‘pension’ is defined in The Macquarie Dictionary, as: ‘1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. and 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 Ltd v. Federal Commissioner of Taxation 93 ATC 4207; (1993) 25 ATR 183 (Tubemakers). His Honour concluded that the essential characteristic of a ‘pension’ is periodic payments.

The loss of earnings payments made to you 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.

An amount made to you as a lump sum representing arrears of unpaid periodic loss of earnings under the TAA 1986 is also a ‘pension’ for the purposes of the Pension Article of the Country Y Agreement. This is because the lump sum amount represents the aggregate of past loss of earnings payments that should have been made on a periodic basis over a particular period of time.

Therefore, the Pension Article applies to give Country Y, as the country of your residence, sole taxing rights over the payment received by you in the 2016 income year.

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