Edited version of your private ruling

Authorisation Number: 1012445994463

Ruling

Subject: International compensation payments

Question 1

Are the compensation payments taxable income?

Answer

Yes

Question 2

Is the portion of the compensation payments to which you are entitled taxable to you?

Answer

Yes

This ruling applies for the following periods:

1 July 2006 - 30 June 2007

1 July 2007 - 30 June 2008

1 July 2008 - 30 June 2009

1 July 2009 - 30 June 2010

1 July 2010 - 30 June 2011

1 July 2011 - 30 June 2012

1 July 2012 - 30 June 2013

1 July 2013 - 30 June 2014

1 July 2014 - 30 June 2015

1 July 2015 - 30 June 2016

The scheme commences on:
1 July 2006

Relevant facts and circumstances

Your parent was involved in a fatal incident overseas in mid-2006.

You and your surviving parent receive compensation as a result of this incident.

Your initial payment was received in 2006. The initial compensation was provided by your parent's employer in Country A.

The compensation payments were then transferred to a payer in Country B. Your first payment received from this payer covered a period in the relevant income year.

Your parent currently receives the compensation in the form of a cheque every month.

The rate of compensation is based on your deceased parent's rate of pay.

Your parent receives a single cheque which is issued in their name.

The compensation includes an amount specified for you, as the deceased's children.

Your parent deposits the cheque into a personal bank account. They have never split the total received to deposit money into you bank accounts.

You or your parent has no ability to change the frequency of these payments or the nature in which they are received.

You are a minor.

You were not taxed on these payments overseas.

You are an Australian resident for tax purposes.

Relevant legislative provisions

Double Tax Agreement between Australia and Country B

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

Income Tax Assessment Act 1997 section 6-15

Income Tax Assessment Act 1997 section 6-20

Income Tax Assessment Act 1936 Division 6AA

Taxation Determination 92/133

Reasons for decision

Subsection 6-5(2) of the ITAA 1997 states that the assessable income of an Australian resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income is income according to ordinary concepts which is not specifically defined in the legislation.

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

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

In your case we consider that your compensation payments have the above characteristics. You receive compensation every X days, which indicates an element of regularity. The computation of the benefits is based on your parent's previous rate of pay - therefore, like salary and wages, it takes on the characteristics of being earned, expected and relied upon.

Furthermore, compensation receipts which substitute for income have been held by the courts to be income under ordinary concepts. (Federal Commissioner of Taxation v. Inkster 89 ATC 5142, 20 ATR 1516; Tinkler v. Federal Commissioner of Taxation 79 ATC 4641, 10 ATR 411; Case Y47 91 ATC 433, 22 ATR 3422).

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 B, which operates to avoid the double taxation of income received by Australian and Country B residents.

In your case it is necessary to establish how your periodic compensations payments are categorised for the purposes of the tax treaty. Article Y states that pensions and other similar remuneration paid to an individual who is a resident of either Australia or Country B will be taxable only in that state. "Pensions and other remuneration" is defined to mean periodic payments made by reason of retirement or death, in consideration for services rendered. As you do not believe that your compensation payments are taxed in Country B, and the documentation you have provided does not indicate taxation of such payments, the compensation payments are taxable in Australia.

Section 6-15 of the ITAA 1997 provides that ordinary income which is exempt income is not assessable income.

Section 6-20 of the ITAA 1997 provides that ordinary income is exempt income if it is made exempt from income tax by a provision of the Income Tax Assessment Act 1936, the ITAA 1997 or another Commonwealth law.

Your compensation payments are not exempt income under section 6-15, nor are they made exempt from income tax under another provision or law.

Therefore the compensation payments are taxable income.

The portion of the compensation payments to which you are entitled is taxable to you.

Taxation Determination TD 92/133 states that compensation paid under an Australian 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 Australian federal legislation but also applies to periodic payments made under other accident or compensation legislation to dependent children of a deceased parent. This is relevant to your situation where you and your surviving parent receive compensation as a result of the death of your parent.

Your name is not on the cheque which is issued every X days, and no amount is deposited into your bank account. However, although you do not receive the compensation payments personally, the payments are designed to include and benefit you. Consequently they are a constructive receipt to you.

Division 6AA of the ITAA 1936
This division discusses the taxation of minors. Special rules apply in calculating the tax payable on income of a minor. Under these special rules certain income earned by minors is taxed at the highest marginal rate. However, there are situations in which these special rules will not apply. Instead, the income derived by the minor will taxed at the usual income tax rates (which apply to taxpayers over the age of 18 years). One of those situations is where the minor is in receipt of compensation income as a result of the loss of parental support.

Conclusion
The compensation payments you receive from Country B are considered ordinary income and are therefore classified as assessable income. The portion that you are entitled to will need to be included in your income tax return.