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Ruling

Subject: Assessability of disability insurance payments

Questions and Answers

1. As a resident of Country X, is your Australian sourced disability insurance pension that you receive assessable in Australia?

Yes

2. Is the tax payable on your Australian disability insurance pension limited to the lesser of 15% or the tax payable in respect of the pension had you been a resident of Australia?

Yes

3. Do you need to lodge a tax return in Australia?

Yes

This ruling applies for the following periods:

Year ended 30 June 2011

Year ended 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

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

You were born in Country X and are a resident of Country X.

You became a non-resident on date M in the 2010-11 income year when you left Australia for Country X.

You were considered to be a permanent resident of Country X immediately on your arrival in Country X.

Your intention is to live permanently in Country X.

You have a disability insurance policy from Australia. The policy provides for regular income-replacement payments if you become sick.

You became very ill in the 2009-10 income year and had to stop working completely some months later.

You began claiming the disability insurance income from date L while still a resident of Australia. The payments will continue.

Tax was withheld from your payments after you left Australia.

You have lodged an income tax return in Australia for the period 1 July 2010 to 30 June 2011 and have declared the income received from your disability insurance policy. You have been taxed as a resident of Australia for the full 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3).

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

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1936 Section 27H.

International Tax Agreements Act 1953 Sch3-Art18.

International Tax Agreements Act 1953 Paragraph Sch3-Art23(2).

Reasons for decision

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of a foreign resident includes statutory income from all Australian sources (subsection 6-10(5) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in this list is section 27A of the Income Tax Assessment Act 1936 (ITAA 1936) which provides that annuities and superannuation pensions are included in assessable income. The payments you receive your disability insurance policy acquire the characteristic of a pension as they are fixed periodical payments made to replace earnings which would have been earned by you.

In determining liability of Australian tax for a Australian sourced income received by a foreign resident, 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).

The Country X double tax agreement operates to avoid the double taxation of income received by Australian and Country X residents.

Article  C of the Country X double tax agreement provides that pensions and annuities arising in Australia may be taxed in Australia. However, the tax charged shall not exceed the lesser of:

§ 15% of the pension or annuity received in the year; and

§ the tax that would be payable in respect of the pension or annuity if the recipient were a resident of Australia.

The tax payable on your pension will be limited to the lesser of 15% or the tax payable in respect of the pension had you been a resident of Australia.

Another Article of the Country X double tax agreement deals with the relief of double taxation and provides that, subject to the provisions of the law of Country X, a credit for any tax paid in Australia will be allowed against Country X tax payable on income from Australian sources.

Your case

You have been in receipt of your disability insurance payments since date L. At that time you were a resident of Australia. These payments are considered to be a pension. You became a non-resident of Australia on date M when you left Australia for Country X.

As you are a resident of Country X in receipt of a pension from Australia, you will need to lodge a tax return and declare the pension you earn each year. The pension should be shown at Item 1 on the tax return (salary or wages which includes income earned for lost wages).

Each year, you will need to attach a note to your tax return requesting that you be taxed in accordance with Article C of the Country X double tax agreement.

You are entitled to a refund of any Australian tax paid in excess of 15 per cent.