ATO Interpretative Decision
ATO ID 2008/145
Income Tax
Periodic compensation payments received by a non-resident individual and the Pension Article of the UK ConventionFOI status: may be released
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This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
Does Article 17, the Pensions and annuities Article (the Pension Article) of the 2003 United Kingdom Convention and Notes (the UK Convention), apply to loss of earnings payments made under section 44 or section 45 of the Transport Accident Act 1986 (Vic) (TAA 1986) or under similar legislation in other Australian States and Territories, to an individual UK resident?
Decision
Yes. The Pension Article of the UK Convention applies to loss of earnings payments made under section 44 or section 45 of the TAA 1986 or under similar legislation in other Australian States and Territories, to the individual UK resident.
Facts
A non-resident individual (the taxpayer) who is a UK resident for the purposes of the UK Convention, received loss of earnings payments from Australia as a result of injury suffered in a transport accident in the State of Victoria.
The payments comprised weekly statutory compensation payments made by the Victorian Transport Accident Commission (TAC) under section 44 or section 45 of the TAA 1986 for loss of income due to the injury.
The payments are calculated by reference to the recipient's pre-accident earnings.
Similar statutory compensation payments are made in other Australian States and Territories under statutory provisions similar to the TAA 1986.
Reasons for Decision
Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from Australian sources.
The loss of earnings payments are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to Australian tax in respect of Australian sourced income received by a non-resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreement Act 1953 (the Agreements Act).
Schedule 1 of the Agreements Act contains the UK Convention (the double tax treaty between Australia and the United Kingdom).
Article 17(1) of the UK Convention provides that pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State. Therefore, pensions paid from Australia to an individual who is a resident of the UK shall be taxable only in the UK.
Article 3(3) of the UK Convention provides that any term not defined in the Convention shall, unless the context requires otherwise, have the meaning it has under the domestic laws in respect of the taxes to which the Convention applies. The term 'pension' is not defined in the UK Convention or in Australia's domestic taxation law.
Taxation Determination TD 93/151 discusses the meaning of a 'pension' for tax treaty purposes in the context of workers compensation payments. Paragraph 1 of TD 93/151 states that a 'pension' is defined in The Macquarie Dictionary, 2001, 3rd edn, The Macquarie Library Pty Ltd, NSW as: '1. a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 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 (Tubermakers). His Honour concluded that the essential characteristic of a 'pension' is periodic payments.
The loss of earnings payments made under section 44 or section 45 of the TAA 1986 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. Accordingly, the periodic compensation payments made to the taxpayer by the TAC under section 44 or section 45 are a 'pension' for the purposes of the Pension Article of the UK Convention.
Therefore, the Pension Article applies to give the UK, as the country of residence of the taxpayer, sole taxing rights over the compensation payments.
Year of income: Year ended 30 June 2008
Legislative References:
Income Tax Assessment Act 1997
subsection 6-5(3)
Schedule 1
Schedule 1, Article 3(3)
Schedule 1, Article 17
Schedule 1, Article 17(1) Transport Accident Act 1986 (Vic)
section 44
section 45
Case References:
Tubemakers of Australia Ltd v. Federal Commissioner of Taxation
93 ATC 4207
(1993) 25 ATR 183
Related Public Rulings (including Determinations)
Taxation Determination 93/151
ATO ID 2007/27
ATO ID 2007/49 ATO Interpretative Decisions overturned by this decision
ATO ID 2001/126
Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Keywords
Double tax agreements
International tax
Periodical sickness or accident compensation payments
ISSN: 1445-2782