Edited version of your private ruling

Authorisation Number: 1012098214478

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Subject: Foreign income - disability pension

Question 1

Is the pension from Country Y, which was paid as a lump sum, assessable in Australia?

Answer

Yes.

Question 2

Is the pension from Country Y assessable to you as Trustee of the X Trust?

Answer

Yes.

Question 3

Did you derive the income in the year that you received the lump sum payments?

Answer

Yes.

Question 4

Will the payment made by Country Y, to cover your Australian tax liability on the lump sum payments, be assessable in Australia?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ended 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commences on:

1 July 2009

Relevant facts and circumstances

X is the sole beneficiary to the Trust.

X is under a legal disability.

X is a resident of Australia for tax purposes.

You are the guardian of X and also trustee of the X Trust.

Whilst living in Country Y, X was receiving a pension from the Government of Country Y.

X received the pension to cover the cost of care.

The pension is taxed in Country Y; however X didn't pay tax on the pension because their earnings were below the tax free threshold in Country Y.

When X moved to Australia, the Government of Country Y stopped paying the pension.

After some negotiations, between you and the Government of Country Y, an agreement was reached for a lump sum to be paid to X in lieu of any further claims for benefit.

You received two lump sum payments, on behalf of X, from the Government of Country Y.

The payments were to cover X's lost and future entitlements to the pension.

As part of the settlement agreement, the Government of Country Y have agreed to pay any Australian tax payable on the lump sum up to $30,000.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 98(1)

Income Tax Assessment Act 1936 section 101

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Reasons for decision

Question 1

Sections 6-5 and 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provide that the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Characteristics of ordinary income that have evolved from case law include receipts that:

· are earned,

· are expected,

· are relied upon, and

· have an element of periodicity, recurrence or regularity.

A pension would generally be considered ordinary income as it is a regular recurrent payment that is relied upon.

Lump sum compensation payment

In FC of T v. Dixon (1952) 86 CLR 540 it was determined that an amount paid to compensate for loss generally acquires the character of that for which it is substituted.

Another case which highlights this is in Sommer v. FC of T (2002) FCA 1205. In this case the taxpayer received a lump sum payment as settlement under an income replacement insurance policy. The payment was to be a full and final settlement of a dispute between the taxpayer and the insurer in relation to the taxpayers past and future claims to be entitled to income replacement benefits as a result of his inability to work. The Federal Court held that the fact that the payment of monthly benefits was made in one lump sum did not change the revenue character of the receipt. Accordingly, the payment was held to be income and assessable to the taxpayer.

This means that even if a regular pension was replaced by a lump sum payment it would not change the revenue character of the receipt; therefore lump sum payment would still be considered assessable income under section 6-5 of the ITAA 1997.

International tax treaty

In determining the liability of an Australian resident to Australian tax on foreign sourced income, it is necessary to consider not only the Australian tax laws but also any applicable tax treaty.

Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act).

The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes).

Australia has signed a tax treaty with the Country Y.

An article of this treaty states that pensions (including government pensions) and other similar remuneration paid to a resident of Australia shall be taxable only in Australia.

Application to your circumstances

As was highlighted above even though you received the pension as two lump sum payments, this does not change the revenue character of the receipt for which it is substituted.

Accordingly, as X is a resident of Australia for tax purposes, the lump sum payments that were received from the Government of Country Y are assessable under section 6-5 of the ITAA 1997.

Question 2

Income assessable to Trustee

In the case of a trust estate, subsection 98(1) of the Income Tax Assessment Act 1936 (ITAA 1936) applies to assess the trustee on a beneficiary's share of income where a beneficiary is presently entitled and is under a legal disability.

Where a trustee has discretion to pay or apply income of a trust estate to or for the benefit of specified beneficiaries (for example, by paying or using the income to pay the beneficiaries' school fees), section 101 of the ITAA 1936 deems a beneficiary to be presently entitled to the amount paid to them or applied for their benefit.

In your case, you are trustee of the X trust and have received the lump sum payments on behalf of X in accordance with the conditions in the settlement agreement. You also manage the income on X's behalf and therefore you are holding the payments in trust for X.

Accordingly, these payments that you received on behalf of X, from the Government of Country Y, are assessable to you as trustee under subsection 98(1) of the ITAA 1936.

Question 3

Derivation of income

In determining the basis of derivation of income, paragraph 42 of Taxation Ruling TR 98/1 states that:

Income from employment would normally be assessable on a receipts basis. Salary, wages or other employment remuneration are assessable on receipt even though they relate to a past or future income period.

In your case, you received the lump sum payment for lost and future entitlement to the pension.

Therefore as per TR 98/1, regardless of what period the payment is for, under the receipts basis, these two lump sum payments are assessable in the financial year that they are received.

Question 4

Indemnification tax liability

As stated above the assessable income of an Australian resident includes their ordinary and statutory income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In your case, as part of the settlement agreement the Government from Country X have agreed to pay any Australian tax payable on the lump sum.

This payment is considered to be an indemnification of your Australian tax liability. It does not satisfy the requirements of ordinary or statutory income. As such this payment is not considered to be assessable income.