Edited version of private advice

Authorisation Number: 1052039314444

NOTICE

The private ruling on which this edited version is based has been overturned on objection.

This notice must not be taken to imply anything about the correctness of other edited versions.

Edited versions cannot be relied upon as precedent or used for determining how the ATO will apply the law in other cases.

Date of advice: 28 October 2022

Ruling

Subject: Injury award payment

Question

Is the monthly payment assessable in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You have been living in Country Y since 20XX.

You intend on moving back to Australia and will resume being a resident of Australia for taxation purposes.

You worked in Country Y for many years.

In XXXX while at work you were in a car accident.

You sustained serious injuries due to the accident.

On XX November XX your condition was formally assessed by two independent qualified medical practitioners appointed by your former employer.

Each of the medical professionals concluded that you suffered a permanent injury causing permanent disablement and that you should be retired from your employment.

Since that time your condition has not changed and you continue to live with your permanent disability.

You are in receipt of a payment calculated to compensate you for your permanent disability.

A letter from the payer makes the following statement about the injury award:

'The Injury award is a monthly payment for life, the amount of the award is derived from the level of permanent disability ascertained in the medical certificate completed at the time - this is undertaken by an independent Qualified Medical Practitioner, as appointed by your former employer, prior to their agreement of the Injury Award.'

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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 derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The courts have identified a number of factors which indicate whether an amount is regarded as ordinary income. 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.

For income tax purposes, an amount paid to compensate for a loss generally acquires the character of that for which it is substituted (Federal Commissioner of Taxation v. Dixon (1952) 86 CLR 540; (1952) 5 AITR 443; 10 ATD 82) (Dixon's case). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; (1989) 20 ATR 1516; 89 ATC 5142, Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641, and Case Y47 (1991) 22 ATR 3422; 91 ATC 433).

In Dixon's case it was found that even if the receipts are not directly attributable to employment or services rendered, the expected regular periodical payments had the character of ordinary income.

Pensions and other living allowances may not be in connection with employment, yet are generally regarded as ordinary assessable income.

In FC of T v. Blake (1984) 75 FLR 315, the characteristics of the payments in question were looked at to decide if they were assessable income. The periodical nature of the payment, the recipient's reliance or otherwise on the payment for regular expenditure on himself and his dependents, led to the decision that the payments were assessable income.

In FC of T v. The Myer Emporium Ltd 87 ATC 4363, the Full High Court said (at p 4370):

The periodicity, regularity and recurrence of a receipt has been considered to be a hallmark of its character as income in accordance with the ordinary concepts and usages of mankind.

Another basic principle is that the character of the receipt must be determined from the point of view of the recipient and not from the standpoint of the payer or some other person.

In Scott v. FC of T (1966) 14 ATD 286, Windeyer J expressed the view that whether or not a particular receipt is income depends upon its quality in the hands of the recipient.

In your case, you are receiving monthly compensation payments. The payments will provide you with an income support which you will be able to rely on for your day to day living expenses. The regularity of your payments and the full circumstances surrounding your case indicate an income nature. The monthly payment is expected and relied upon.

Your monthly compensation payments have the major characteristics of ordinary income identified above and the payments are assessable under subsection 6-5(2) of the ITAA 1997.

Schedule 3 to the International Tax Agreements Act 1953 (the Agreements Act) contains the tax treaty between Australia and Country Y.

The country Y Convention operates to avoid the double taxation of income received by Australian and Country Y residents.

Subsection 4(1) of the Agreements Act provides that the Agreements Act incorporates the ITAA 1997 and those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited situations that are not relevant in the present case).

Article 17 of Country Y Convention provides that pensions and annuities arising in Country Y and paid to a resident of Australia shall only be taxed in Australia.

In relation to the meaning of the term 'pension', Taxation Determination TD 93/151, which deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's tax treaties, states at paragraph 1:

A pension is defined in the Macquarie Dictionary as '1. A fixed periodical payment made in consideration of past services, injury or loss sustained, merit, poverty etc. 2. An allowance or annuity.' The meaning of the term 'pension' was considered by Hill J. in the Federal Court in Tubemakers of Australia Ltd v. FCT (1993) 25 ATR 183. His Honour concluded that the essential characteristic of a pension is that there be periodical payments.

In your case your monthly payment will be taxed in Australia once you return to Australia and resume being a resident of Australia for taxation purposes.