Edited version of private advice

Authorisation Number: 1051811654946

Date of advice: 12 March 2021

Ruling

Subject: Overseas disability pension

Question 1

Are your overseas disability payments received for damages arising from a personal injury sustained in an accident at work ordinary income?

Answer

Yes.

Question 2

Are your overseas disability payments received for damages arising from a personal injury sustained in an accident at work exempt capital payments under section 118-37 of the Income Tax Assessment Act 1997?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Country A and you were a previous tax resident of Country A.

You are a resident of Australia for taxation purposes.

Whilst working in Country A, a work injury forced you to quit your working career.

The injury entitled you to receive a fixed disability pension paid by the National Insurance Institute of Country A.

A person recognized by the National Insurance Institute of Country A as a work-injured person and who remained with a disability due to the work injury, may be entitled to a work disability benefit - either a monthly payment or a grant.

The insured person must appear before a medical board that will determine their degree of disability as a percentage, according to which they will receive a monthly payment or a grant pursuant to the rules of the Law.

The nature of payment (grant or monthly payment) is determined according to the degree of disability whereas the grant is paid under 20% rate, and in cases where the degree of disability is over 20% the insured receives a monthly payment.

Section 113 to the Country A Insurance Law determines that a disabled person whose degree of disability level is over 20% and earns adequate base of salary for his living, may apply with a request for a one-time payment of future payments.

The work injury incurred forced you to quit your working career. In your case the Medical board determined a disability degree of 28%.

As such you an option to receive a tax- free lump-sum payment at that time, but instead you opted to receive regular monthly recurring payments.

The fixed disability pension continues to be payable for the remainder of your life irrespective of any other income earnt.

Relevant legislative provisions

Income Tax Assessment Act Section 6-5

Income Tax Assessment Act Section 6-10

Income Tax Assessment Act Section 10-5

Income Tax Assessment Act Section 15-30

Income Tax Assessment Act Section54-10

Income Tax Assessment Act Section54-15

Income Tax Assessment Act Section54-20

Income Tax Assessment Act Section54-45

Income Tax Assessment Act Section 102-5

Income Tax Assessment Act Section118-37

International Tax Agreements Act 1953

Reasons for decision

Question 1

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

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:

• are earned
• are expected
• are relied upon; and
• have an element of periodicity, recurrence or regularity.

A compensation amount generally bears the character of that which it is designed to replace.

If the compensation is paid for the loss of a capital asset or amount then it will be regarded as a capital receipt and not ordinary income.

However, in your case you are receiving regular disability pension payments (as compensation for your work injury) that is not income from rendering personal services, income from property or income from carrying on a business.

The amounts you receive are recurring payments as opposed to a one-off capital payment for the specified event that occurred (the work injury sustained) and as such the disability pension payments have an element of recurrence or regularity. In addition these payments can be said to be expected and also relied upon.

Accordingly, and despite the fact that the payments are not income from rendering personal services, income from property or income from carrying on a business, the payments still have characteristics of ordinary income and are therefore assessable under section 6-5 of the ITAA 1997.

Country A Convention

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 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 Convention between The Government of Australia and The Government of the State of Country A for the elimination of double taxation with respect to taxes on income and the prevention of tax evasion and avoidance (The Country A Convention) is listed in section 5 of the Agreements Act.

The Country A Convention is located on the Austlii website (http://www.austlii.edu.au/) in the Australian Treaties Series database. The Country A Convention operates to avoid the double taxation of income received by residents of Australia and Country A.

Article Y of the Country A Convention agreement advises that items of income beneficially owned by a resident of Australia, wherever arising, not dealt with in the foregoing articles of this convention shall be taxable only in Australia unless the income arises in Country A. If the income arises in Country A, then the income may also be taxed in Country A.

In your case, the type of payments you receive has not been dealt with any foregoing articles to article Y of the Country A Convention. As such article Y gives Australia taxing rights to your payments.

Therefore, the payments maybe assessable in Australia under article 21 of the Country A Convention.

We also advise that the type of payments you receive do not fall under article Z of the Country A Convention (which covers pensions). However, even if these payments did fall under article Z, your payments would still be taxable in Australia as pensions and other similar remuneration paid to a resident of Australia shall be taxable only in Australia under article 17 of the Country A convention.

Division 54 of the ITAA 1997 (Structured settlements)

Division 54 of the ITAA 1997 provides a tax exemption for certain payments made under structured settlements and structured orders. To be a structured settlement or a structured order, paragraph 54-10(1)(e) and paragraph 54-10(1A)(e) provide the following criterion must be met:

...some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more life insurance companies or State insurers:

(i)    an annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or

(ii)   such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person.

For the sake of clarity, section 54-15 and section 54-20 of the ITAA 1997 (in combination) provide that a payment of a personal injury annuity made to the injured person is exempt from income tax if the compensation or damages that were used to purchase the annuity would not have been assessable income under section 118-37 of the ITAA 1997 in the event those compensation or damages had instead been paid to the injured person in a single lump sum on the date of the settlement or order.

Section 54-45 provides a payment of a personal injury lump sum that is made to the injured person is exempt from income tax if: (a) there is at least one personal injury annuity (provided under the same structured settlement or structured order) that satisfies the conditions in Subdivision 54-B; and (b) the other conditions in this Subdivision are satisfied.

A 'personal injury lump sum' means a lump sum: (a) that is purchased under the terms of a structured settlement as mentioned in paragraph 54-10(1)(e) or (b) that is purchased under the terms of a structured order as mentioned in paragraph 54-10(1A)(e).

In your case, your compensation was not received from a 'structured settlement' given that you have not provided any information to confirm that it did included the criterion of an annuity purchased for you/on your behalf. This is despite the fact that it the compensation could be quantified as relating to personal injury.

It follows your compensation receipts are not exempt under Division 54 of the ITAA 1997.

Question 2

Capital gains arising from a compensation payment that is capital in nature

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision.

Section 10-5 of the ITAA 1997 lists those provisions.

Included in this list is Section 15-30 of the ITAA 1997 which provides that your assessable income includes an amount you receive by way of insurance or indemnity for the loss of income if:

•         the lost amount would have been included in your assessable income: and

•         the amount received is not ordinary income under section 6-5 of the ITAA 1997.

In your case the recurring payments you receive were not for loss of income.

Also included in this list is section 102-5 of the ITAA 1997 which deals with capital gains.

However, paragraph 118-37(1)(a) of the ITAA 1997 disregards a capital gain made where the amount relates to compensation or damages you receive for any wrong, injury or illness you suffer personally.

In your case, the recurring compensation payments you receive are for an injury suffered by you in your workplace. The 'injury' suffered for the purposes of paragraphs 118-37(1)(a) of the ITAA 1997 is the loss that you have suffered and therefore, any capital gain arising from any capital payments received will be disregarded but only where the payment is a capital payment.

In your case, you had an option to receive a tax- free lump-sum payment, but instead you opted to receive regular monthly recurring payments.

Accordingly, the recurring compensation payments you receive are not exempt capital payments and are assessable under section 6-5 of the ITAA 1997 as they are not a one-off capital payment.

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