Edited version of private ruling

Authorisation Number: 1011676581620

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Ruling

Subject : Assessability of compensation income from another country

Question 1

Are quarterly and lump sum compensation payments you receive from another country assessable in Australia?

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 2006

Relevant facts

You received injuries from an accident in another country a number of years ago.

The other country has a no fault accident compensation scheme that provides insurance cover for all accident-related injuries regardless of whether or not they are work related.

The scheme is run by a statutory authority of the other country (the Authority). The Authority is responsible for administering the relevant Act of Parliament. The Authority assists with the costs of health treatment, provides income replacement and lump sum payments in cases of permanent disability and allowances for long-term impairment as a result of an injury. An allowance is normally paid quarterly and is exempt from tax in the other country.

An assessment of your injuries by the Authority determines the amount of the payment you will receive. As your accident occurred prior to a specific date, you may be eligible for an allowance. The amount you receive depends upon your level of impairment. As a result of your accident, you have been assessed by the Authority with a certain percentage of impairment and/or loss of bodily function.

You arrived in Australia on a few years after your accident and have been a permanent resident since you arrived.

You received a lump sum payment from the Authority of a specified amount a particular date. This payment was an accumulation of quarterly compensation payments since the accident.

You then received quarterly payments during the next three years.

You then received a further lump sum payment recently of another specified amount. This payment is an advance payment for the next few years of your quarterly payments.

Payments you have received as a lump sum are an accumulation of quarterly payments. They are not a separate payment to your quarterly payments.

You received a letter from the ATO which advised that the ATO was aware that you have transferred money to or from another country. You were advised to review your situation and determine if you need to disclose any information to the ATO.

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 Subsection 4(1)

International Tax Agreements Act 1953 Subsection 4(2)

International Tax Agreements Act 1953 Schedule 4 Article 3(3)

International Tax Agreements Act 1953 Schedule 4 Article 18(1)

International Tax Agreements Act 1953 Former Article 19 of Schedule 4

Reasons for decision

Question 1

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 derive directly or indirectly from all sources, whether in or out of Australia, during the income year.

Regular payments made to compensate a taxpayer for long term impairment have the character of 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.

Based on case law, it can be said that ordinary income generally includes receipts that:

· are earned

· are expected

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

In your case, the quarterly compensation payments you receive are not earned by you as they do not relate to services performed. However, as they are paid quarterly, they have the element of recurrence or regularity. The payments can be said to be expected, and possibly relied upon. Therefore, your quarterly compensation payments have the character of ordinary income. Accordingly, they are assessable under section 6-5 of the ITAA 1997.

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 (the Agreements Act).

A Schedule to the Agreements Act contains the tax treaty between Australia and the other country (the Convention). The Convention operates to avoid the double taxation of income received by residents of Australia and the other country.

Subsection 4(1) of the Agreements Act provides that the Agreements Act incorporates the ITAA 1997 and 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 situations that are not relevant in the present case).

A former Article of the Convention provided that pensions (including government pensions) and annuities sourced in the other country and paid to a resident of Australia are taxable only in Australia.

The term 'pension' is not defined in the Agreement.

Another Article of the Agreement provides that any term not defined in the Convention is to have the meaning it has under the domestic tax law of the country applying the Convention.

Taxation Determination TD 93/151 provides at paragraph 1 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. 2. an allowance or annuity." The meaning of the term "pension" was considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.

In your case, your quarterly compensation payments fall within the Macquarie Dictionary meaning of 'pension' in that they are fixed periodical payments made in consideration of injury or loss sustained. Furthermore, the payments have the essential characteristic of a pension as per Hill J. in the Tubemakers Case in that they are periodical payments made quarterly.

The quarterly compensation payments made to you from the Authority are a pension for the purposes of the Convention and are taxable in Australia, (notwithstanding that these payments are exempt from tax in the other country). Accordingly, the payments are ordinary income and are therefore assessable under section 6-5 of the ITAA 1997.

You received lump sum payments on 2 occasions from the Authority. These lump sum payments are an aggregation of your quarterly compensation payments, either in arrears or advance.

A lump sum payment generally bears the character of that which it is designed to replace and that the method of payment does not alter the character of the payment.

In your case, your lump sum payments have the character of ordinary income in the same way as your quarterly compensation payments. Therefore, your lump sum payments are assessable income in the year in which they are received.

Note

Amendments were made to the International Tax Agreements Act 1953 by the inclusion of the new Convention. The new Convention entered into force on a particular date. The new Convention will be effective for Australian tax purposes in respect of taxes on income, profits or gains for the year beginning 1 July after it entered into force and later years.

An Article of the new Convention deals with pensions. This Article provides that generally pensions and similar periodic remuneration is taxable only by the country of residence of the recipient. However, where such income arises in the other country, it is not taxed by the residence country to the extent that the income would not be subject to tax in the source country if the recipient were a resident in the source country.

In your case, as an Australian resident receiving a pension from the other country which is exempt from tax in the other country, the pension is now exempt from tax in Australia.

However, pensions that are not subject to tax may still be taken into account for the purpose of calculating a person's income-targeted assistance and obligations such as Centrelink payments, child support and student loans.