Edited version of private ruling

Authorisation Number: 1011691327808

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Ruling

Subject: Assessability of compensation payment

Question:

Is the compensation income you receive from Australia assessable in Australia?

Answer:

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

Relevant facts and circumstances

You are a non-resident of Australia for tax purposes.

You have never been to Australia.

You are residing overseas permanently.

You do not have any assets in Australia.

Your spouse was employed by an Australian company for a period of approximately 8 years over 20 years ago.

Your spouse had been certified as being disabled from an identified disease.

The Board approved an award to your spouse for spouse's disablement.

Your spouse passed away.

You applied for compensation as your spouse's dependant.

The relevant authority determined that you were entitled to an award of a lump sum and weekly compensation payments which are subject to CPI increments.

The lump sum amount was awarded to you and held in trust in accordance with the relevant Act.

A weekly payment as outlined above was awarded to you in accordance with the relevant Act.

An amount of tax was withheld from this payment.

An amount of tax is withheld from the fortnightly payments.

You have not received any pension or assistance from your country of residence for almost one year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5(1)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-10(5)

International Tax Agreements Act 1953

Reasons for decision

Ordinary income

Ordinary income received directly or indirectly from an Australian source, by someone who is not a resident of Australia is assessable income. In addition to ordinary income, other forms of income from all Australian sources, is also included in a non resident's assessable income.

Income tax legislation does not provide any further guidance on what is meant by ordinary income. Therefore, to determine whether a particular receipt is ordinary income we have to examine public rulings and determinations issued by the Tax Office and investigated by the Courts in case law.

The major characteristics of ordinary income which have been identified by the Courts are as follows:

§ it is earned (as a result of work performed)

§ it is received regularly

§ it is expected

§ it is depended upon

§ it supplements income

§ it replaces income.

It is not necessary for all of these characteristics to apply to a particular receipt for it to be considered ordinary income.

The Tax Office's view on the assessability of compensation payments is contained in a number of public rulings. The views contained in these rulings are based on case law.

Taxation Determination TD 93/3 explains that periodical compensation payments are considered to be ordinary income because they are paid as compensation for loss of income and/or because they are received regularly and are intended to provide an income supplement.

Taxation Ruling IT 2107 advises that a lump sum compensation payment consisting of arrears of periodical compensation payments is also considered to be ordinary income.

In your case you are receiving compensation income from an Australian organisation as the dependant of a deceased worker who had received an award from an Australian company. The award was made in relation to his disablement an identified disease attributable to the work carried out in Australia.

International tax agreements between Australia and other countries

When we look at income from Australia received by a non resident, we also have to check if there are any tax agreements between Australia and the country of residence of the non resident. 

We will examine the tax agreement between Australia and your country of residence.

The relevant tax agreement was created to avoid any double taxation of income received by Australian residents and residents of your country. The tax agreement contains a number of Articles that deal with different types of income. The particular Article of the tax agreement tells us that an Australian sourced pension paid to an individual who is a resident of your country shall be taxable only in your country.

The term 'pension' is not described in the tax agreement however Taxation Determination TD 93/151 explores the application of pension articles in Australia's tax agreements with other countries in the perspective of periodic compensation payments made by a compensation organisation in Australia.

TD 93/151 refers to the dictionary definition of pension. The Macquarie Dictionary defines a pension as a fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etcetera. TD 93/151 also makes reference to a Court case in which the conclusion was reached that the essential characteristic of a pension is only that there be periodical payments.

Consequently, the income you receive from the Australian organisation is within the meaning of a pension under the Article of the tax agreement between Australia and your country of residence.

Conclusion

As you are not a resident of Australia and you are in receipt of Australian-sourced pension income, under the Article of the tax Agreement between Australia and your country of residence, this income is taxed in your country of residence. Therefore, it is not assessable in Australia.

Other information

We suggest that you should provide a copy of this ruling to the Australian organisation for their records so they can process the refunding of any withholding tax already collected and that any future payments will not be subject to pay as you go withholding tax.