Edited version of your written advice

Authorisation Number: 1051479087896

Date of advice: 5 February 2019

Ruling

Subject: Compensation payment for disability

Question

Is your disability compensation payment for loss of income due to injury from Country A assessable in Australia?

Answer

Yes

This ruling applies for the following periods:

Year ended 30 June 2019

The scheme commenced on:

1 July 2018

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are a resident of Australia for taxation purposes.

You receive an employee disability compensation pension benefit from your former employer every X months.

This compensation is paid for loss of income, as a disability payment for an injury sustained while working for your former employer overseas.

You were advised by your former employer that your X monthly payments will be terminated in favour of a lump sum compensation to be paid in X equal payments.

These payments were made on DDMMYY, DDMMYY and DDMMYY.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(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 derive directly or indirectly from all sources, whether in or out of Australia, during the income year.

Regular payments made to compensate a taxpayer for long term impairment have the character of ordinary income.

Ordinary income has generally been held to include three categories, namely:

● income from rendering personal services

● income from property, and

● income from carrying on a business.

Based on case law, it can be said that ordinary income generally includes receipts that:

● are earned

● are expected

● are relied upon, and

● have an element of periodicity, recurrence or regularity.

In your case, the quarterly compensation payments you receive are not earned by you as they do not relate to services performed. However, as they are paid quarterly, they have the element of recurrence or regularity. The payments can be said to be expected, and possibly relied upon.

Therefore, your quarterly compensation payments have the character of ordinary income. Accordingly, they are assessable under section 6-5 of the ITAA 1997.

Article 18 of the Double Tax Agreement (DTA) between Australia and Country A - Pensions, annuities, alimony and child support states that:

(1) Subject to the provisions of Article 19 (Governmental remuneration), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State.

(4) The term "pensions and other similar remuneration", as used in this Article, 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.

Taxation determination TD 93/58 provides that:

1. It is assessable income under subsection 25(1) of the Income Tax Assessment Act 1936 (ITAA):

(a) if the payment is compensation for loss of income only e.g. past year profits, and/or interest (even when the basis of the calculation of the lump sum cannot be determined); or

(b) to the extent that a portion of the lump sum payment is identifiable and quantifiable as income. This will be possible where the parties either expressly or impliedly agree that a certain portion of the payment relates to a loss of an income nature [cf. Mc Laurin v. FC of T (1961) 104 CLR 381; (1961) 8 AITR 180 and Allsop v. FC of T (1965) 113 CLR 341; (1965) 9 AITR 724].

The meaning of the term “pension” was considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.

In your case, your quarterly compensation payments fall within the Macquarie Dictionary meaning of ‘pension’ in that they are fixed periodical payments made in consideration of injury or loss sustained. Furthermore, the payments have the essential characteristic of a pension as per Hill J. in the Tubemakers Case in that they are periodical payments made quarterly.

The quarterly compensation payments made to you from your former employer are a pension for the purposes of Country A’s agreement and are taxable in Australia, (notwithstanding that these payments are exempt from tax in Country A). Accordingly, the payments are ordinary income and are therefore assessable under section 6-5 of the ITAA 1997.

You received lump sum payments on X occasions from your former employer. These lump sum payments are an aggregation of your quarterly compensation payments, either in arrears or advance.

A lump sum payment generally bears the character of that which it is designed to replace and that the method of payment does not alter the character of the payment.

In your case, your lump sum payments have the character of ordinary income in the same way as your quarterly compensation payments. Therefore, your lump sum payments are assessable income in the year in which they are received.