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Edited version of private ruling
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Ruling
Subject: Independence allowance
Question 1
Are the quarterly compensation payments you receive from country X assessable in Australia?
Answer
Yes.
Question 2
Is the lump sum payment you received assessable?
Answer
Yes.
This ruling applies for the following period;
Year ended 30 June 2007
Year ended 30 June 2008
Year ended 30 June 2009
Year ended 30 June 2010
The scheme commenced on:
01 July 2007
The scheme that is the subject of this ruling
You are an Australian resident for tax purposes.
You are in receipt of a quarterly compensation payment from a corporation in country X.
You received a lump sum payment. After you receive this payment you will not receive any more quarterly payments for X years.
Your quarterly compensation payment is not taxed in country X.
You will receive payments for the rest of your life.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Subsection 6-5(2).
International Tax Agreements Act 1953
Reasons For Decision
Assessability of compensation payments
Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
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 ordinary income that have evolved from case law include:
- receipts that are earned
- expected,
- relied upon
- have an element of periodicity, recurrence or regularity.
The quarterly compensation payments you received are not earned by you as they do not relate to services performed. The payments are paid on a three monthly basis therefore they have the element of recurrence or regularity. The payments can be said to be expected, and perhaps relied upon. Therefore, the payments have the characteristic of ordinary income. Accordingly they are assessable under section 6-5 of the ITAA 1997.
Overseas income
In determining liability to tax on foreign sourced income received by an Australian resident taxpayer 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 (Agreements Act).
Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).
Schedule X to the Agreements Act contains the tax treaty between Australia and country X (the country X Agreement). The country X Agreement operates to avoid the double taxation of income received by Australian and country X residents.
In your case it is necessary to establish how your quarterly compensation payments are categorised for the purposes of Australia's tax treaty.
An Article of the country X Agreement deals with the taxation treatment of other income. It provides that other income sourced in country X and paid to a resident of Australia is taxable only in Australia.
Consequently the quarterly payments from the country X corporation are taxable in Australia for the purposes of the country X Agreement.
Therefore the payments you receive are assessable under section 6-5 of the ITAA 1997.
Lump sum payment
Compensation receipts which substitute for income have been held by the courts to be income according to ordinary concepts. As such, amounts that have been received to compensate for loss of income will be subject to tax as income according to ordinary concepts.
Therefore, the lump sum payment you received for advanced quarterly payments is assessable.