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Edited version of your written advice
Authorisation Number: 1012858057655
Ruling
Subject: compensation payments
Question and Answer
Are the compensation payments you receive from a foreign country assessable in Australia?
No.
This ruling applies for the following period(s)
Year ended 30 June 2015
Year ended 30 June 2016
Year ended 30 June 2017
Year ended 30 June 2018
The scheme commences on
1 July 2014
Relevant facts and circumstances
You are an Australian citizen.
You are an Australian resident for taxation purposes.
You receive compensation payments from a foreign country.
You have never declared this income as it is non-taxable in a foreign country. You believe it to be non-taxable in Australia also as similar payments made by the Australian Government are also non-taxable here.
Recently an Australian Government agency assessed this income as a foreign pension. You dispute this as it is not a pension but compensation payments.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Subsection 6-5(2)
International Tax Agreements Act 1953 Section 4
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 for tax purposes includes ordinary income derived directly or indirectly from all sources during the income year.
In determining liability to tax on Australian sourced income received by a foreign 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).
A foreign country agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The agreement operates to avoid the double taxation of income received by residents of Australia and a foreign country.
Paragraph 18(1) of the foreign country Convention provides that pensions and other similar remuneration payments made by a foreign country to an individual for past services who is a resident of Australia for tax purposes shall only be taxed in a foreign country.
Paragraph 18(4) of the foreign country Convention states that "pensions and other similar remuneration" means periodic payments made by reason of retirement or death, in consideration for services rendered, or by way of compensation paid after retirement for injuries received in connection with past employment.
In your case, you are an Australian resident for tax purposes who receives compensation payments from a foreign country on account of service-connected disability.
Therefore, the compensation payments you receive from the foreign country are not included in your assessable income in Australia under section 6-5 of the ITAA 1997 as they are only subject to the foreign country's taxation law.