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Ruling

Subject: Foreign income - pensions/annuities

Question 1

Is the lump sum payment you receive from country X assessable in Australia?

Answer: Yes.

Question 2

Are the weekly compensation payments your children receive from country X assessable to them?

Answer: Yes.

Question 3

Are the weekly compensation payments your children receive from country X treated as excepted assessable income?

Answer: Yes.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts

You and your children are residents of Australia for income tax purposes. 

Your spouse passed away in country X.

You received weekly compensation payments country X.

The weekly compensation payments were being made to you as a surviving spouse.

You accepted an offer form country X which converted future weekly compensation payments into a lump sum payment. This commutation amount is in lieu of the future stream of your weekly compensation payments.

Your weekly compensation payments ceased and a lump sum payment was received by you form country X

Your children receive weekly compensation payments from country X which are paid into your bank account.

Your children are under eighteen years of age.

There is a tax treaty between Australia and Country X. 

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2).

Income Tax Assessment Act 1997 subsection 6-5(4).

Income Tax Assessment Act 1936 subsection 102AE(2).

Reasons for decision

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.

Pensions and other similar periodic income replacement payments have the character of ordinary 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).

Australia has a tax treaty with country X which 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 weekly compensations payments are categorised for the purposes of Australia's tax treaty.

Taxation Determination TD 93/151 deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's tax treaty.

TD 93/151considers that Comcare payments are fixed periodical payments and that they are pensions within the ordinary meaning of that term and therefore fall within the Pensions Articles for the purposes of the Australia's tax treaty.

While the payments you are receiving are not paid by Comcare, they are similar to Comcare payments in that they are fixed periodical payments made in consideration of injury or loss sustained. As such the payments you are receiving are considered to be a pension for the purposes of the country X Agreement.

An article of the country X Agreement provides that pensions (including government pensions) and annuities sourced in country X and paid to a resident of Australia are taxable only in Australia.

Consequently the weekly compensations payments from country X are a pension for the purposes of the country X Agreement and are taxable only in Australia.

In addition, country X provides that a liability to make weekly payments may be, on application by the person entitled to the weekly payments, commuted to a lump sum payment.

Taxation Determination TD 93/3 considers that a lump sum payment, which is a partial commutation of weekly payments, does not change its character of compensation for loss of income. Effectively, the payment is an advance of future weekly payments. Consequently, it continues to be assessable as ordinary income.

The commutation amount offered by country X is a settlement of the future weekly compensation payments. The amount is in lieu of the future stream of your weekly compensation payments. As the periodic payments are ordinary income, this lump sum payment will accordingly retain the character of being ordinary income.

Therefore, the lump sum commutation amount you have receive is ordinary income and is included in your assessable income under subsection 6-5(2) of the ITAA 1997.

Weekly compensation payments paid to your children

TD 92/133 states that compensation paid under a federal workers compensation act is assessable to the child of the deceased employee and not the child's parent or guardian. Even if the parent actually receives the payments, they are a constructive receipt of the child and therefore deemed to be derived by the child in accordance with subsection 6-5(4) of the ITAA 1997.

TD 92/133 is not confined to payments made under federal legislation but can also be applied to other accident or compensation legislation that applies to dependent children of a deceased parent.

Minors are taxed by applying special rules contained in Division 6AA of the Income Tax Assessment Act 1936 (ITAA 1936). Division 6AA sets down various rules to determine what rates of tax should apply to different types of income derived by minors. Not all types of income are caught by the special rules. The rules mainly apply to 'unearned' income such as dividends, interest, rent and so forth.

The weekly payments your children received form country X are considered 'excepted assessable income' under subsection 102AE (2) of the ITAA 1936 and therefore the income is taxed at ordinary tax rates.