Edited version of private advice

Authorisation Number: 1051786622956

Date of advice: 7 December 2020

Ruling

Subject: Assessable income

Question 1

Are the payments you received from your employer using your personal leave balance assessable in Australia?

Answer

No

Question 2

Are the salary continuance insurance payments you received under your employer's insurance policy assessable in Australia?

Answer

No

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Country A.

You moved to Australia in 20XX and commenced working for your current employer.

After working in Australia for several years, you accepted an assignment to Country B which was intended for a duration of several years.

You moved to Country B in 20XX.

Due to severe illness, you had to end your assignment early and moved to Country A to recover from illness.

You remained an employee and continued to be paid from Australia by your employer throughout the duration of your assignment, and the cost of your remuneration was recharged to the Country A entity.

You have been using your personal leave balance which had accrued since commencing employment.

This is paid from your employer into an Australian bank account.

Your employer has applied for an insurance payout for salary continuance for you. The insurance policy is held as a group policy to cover all employees.

The salary continuance will replace your monthly salary until you are well enough to return to work.

The insurer is based in Australia.

You are a resident solely of Country A at the time of receiving salary continuance insurance payout.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 subsection 6-5(3)

International Tax Agreements Act 1953

Reasons for decision

Question 1

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

The payments you received from using your personal leave balance while recovering from illness are similar to salary and wages therefore are ordinary income for the purpose of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax in respect of Australian sourced income received by a foreign resident, 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 (the Agreements Act).

Section 4 of the Agreements Act incorporates the Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one.

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country A Convention is listed in section 5 of the Agreements Act.

Article Z of the Convention provides that salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.

In your case, you are not exercising the employment in Australia and you were solely a resident of Country A at the time of receiving the payments.

Therefore, the payments you received from using your personal leave balance while recovering from illness in Country A are not assessable in Australia.

Question 2

An amount paid to compensate for loss generally acquires the character of that for which it is substituted (FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income according to ordinary concepts (FC of T v. Inkster 89 ATC 5142; (1989) 20 ATR 1516 (Inkster) and Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411).

The assessability of the salary continuance insurance payments will be determined on similar principles to Question 1. The salary continuance will replace your monthly salary until you are well enough to return to work, therefore are ordinary income for the purpose of subsection 6-5(3) of the ITAA 1997. However, under Article Z of the Country A Convention, the payments are not assessable in Australia.