Edited version of private advice

Authorisation Number: 1051640310211

Date of advice: 31 March 2020

Ruling

Subject: Residency of Australia for taxation purposes

Question

Are your workers compensation payments subject to the working holiday maker (WHM) rates of tax for the period 1 July XXXX to XX XXXX XXXX?

Answer

Yes.

Question

Are your workers compensation payments subject to the working holiday maker (WHM) rates of tax for the period post XX XXXX XXXX to 30 June XXXX?

Answer

No.

This ruling applies for the following period:

Year ending 30 June XXXX

The scheme commences on:

1 July XXXX

Relevant facts and circumstances

You initially arrived in Australia on a WHM visa.

You then changed to another visa.

You injured yourself at work.

You have been receiving workers compensation payments weekly which represent 80% of your income.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1936 Subsection 6(1)

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts.

Ordinary income has generally been held to include 3 categories, namely, income from rendering personal services, income from property, and income from carrying on a business.

Other characteristics of income that have evolved from case law included receipts that:

·         are earned

·         are expected

·         are relied upon, and

·         have an element of periodicity, recurrence or regularity.

Payments of salary and wages are examples of ordinary income.

Receipts that are not salary or wages, but are paid as a substitute for salary or wages that would normally have been earned, expected and relied upon by a taxpayer, are also assessable as ordinary income.

The general principle is that such payments take on the character of the salary or wages they replace. That is, if the substituted amount was an amount of ordinary income, the amount paid to compensate for the loss of that amount will also be ordinary income.

In your case the weekly compensation payments was awarded to you to replace income you were unable to earn whilst injured.

As the payment is compensating you for income that would have been assessable income, this payment is therefore treated as also being assessable income and must be included in your income tax return in the XXXX income year.

The Working Holiday Maker (WHM) tax rates take effect during the period you are considered to be a WHM. The end of the WHM Visa marks the date new tax rates are to be applied. In this case, you are subject to the WHM rates of tax up until you changed from a WHM visa to the student visa on XX XXX XXXX.

You are not subject to the WHM tax rates from the cessation of your WHM Visa on XX XXXX XXXX.

From XX XXXX XXXX the resident rates of tax apply to your income which includes the tax free threshold.

The following is the definition of a working holiday maker:

An individual is a working holiday maker at a particular time if the individual holds at that time:

(a) a Subclass 417 (Working Holiday) visa; or

(b) a Subclass 462 (Work and Holiday) visa; or

(c) a bridging visa permitting the individual to work in Australia if:

(i) the bridging visa was granted under the Migration Act 1958 in relation to an application for a visa of a kind described in paragraph (a) or (b); and

(ii) the Minister administering that Act is still to make a decision in relation to the application; and

(iii) the most recent visa, other than a bridging visa, granted under that Act to the individual was a visa of a kind described in paragraph (a) or (b)

(subsection 3A(1) of the Income Tax Rates Act 1986).

This means that from XX XXXX XXXX you were not subject to the WHM rates of tax as you were on a XXXX visa.

Prior to XX XXXXX XXXX your income including the compensation payments are subject to the WHM rates of tax as you were on a WHM visa and a WHM bridging visa.