Edited version of private advice

Authorisation Number: 1052152334951

Date of advice: 8 August 2023

Ruling

Subject: Australian source - assessable income

Question 1

Are the payments received from the insurer considered to be assessable income in accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Are the payments received from the insurer considered Income From Employment in accordance with Article 15 of the Double Tax Agreement between Australia and Country A?

Answer

Yes

Question 3

Are the payments received from the insurer considered Income From Employment in accordance with Article 18 of the Double Tax Agreement between Australia and Country A?

Answer

No

This ruling applies for the following periods:

Financial year ending 30 June 20YY

Financial year ending 30 June 20YY

Financial year ending 30 June 20YY

The scheme commenced on:

DD MM YYYY

Relevant facts and circumstances

You are an Australian citizen.

You reside in Country A under a certain Visa.

You have been receiving Australian Income Protection Insurance for XX years from the insurer.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

International Tax Agreements Act 1953

Reasons for decision

Detailed reasoning

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer, includes ordinary income derived directly or indirectly from all sources, during an income year. Subsection 6-5(3) provides that if you are a foreign resident your assessable income includes the ordinary income derived directly or indirectly from all Australian sources during the income year.

The legislation does not provide a definition of 'ordinary income' therefore it is necessary to turn to case law in deciding whether a payment constitutes ordinary income. Characteristics of 'ordinary income' that has evolved from case law includes receipts that have the following characteristics:

•         an element of periodicity, reoccurrence or regularity

•         the receipts are relied upon, and

•         the receipt is expected.

Income tax treatment of regular monthly compensation payments

Generally, amounts paid to compensate for a loss generally acquires the character of that for which it is substituted. Therefore, periodical payments made as compensation or substitute for loss of income as a result of accident or injury is considered ordinary income. (Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142, (1989) 20 ATR 1516; Tinkler v. FC of T 79 ATC 4641; (1979) 10 ATR 411;).

Application to your circumstances

In your case, you are in receipt of monthly compensation payments from the insurer. These amounts are paid as a substitute for loss of income which was previously received as employment income. The payments are considered replacement of ordinary income and are therefore assessable under section 6-5 of the ITAA 1997.

Question 2 and 3

Detailed reasoning

You receive monthly payments from an insurer which are sourced from Australia. These payments are ordinary income.

In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189-190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact.

As stated by Bowen J in Federal Commissioner of Taxation v. Efstathakis (1979) 9 ATR 867; 79 ATC 4256 (the Efstathakis Case) at ATR 870; ATC 4259, to determine source:

... the answer is not to be found in the cases, but the weighing of the relative importance of the various factors which the cases have shown to be relevant.

As per the relevant court cases, source cases concerning the provision of income from employment are decided by weighing up the outcomes of the considerations of the following three factors (with the weighting given to each determined by their relevance to the case):

•                     the place where the contract of employment is entered into,

•                     the place where the remuneration is payable, and

•                     the place where the services are performed.

In your case:

•                     The policy contract with the insurer was entered into in Australia.

•                     The compensation payments you receive from the insurer are paid from Australia.

•                     Australian law applies to the contract.

Therefore, the source of the income you receive from the insurer is Australian and will remain so even if you become a non-resident of Australia.

In determining your liability to pay tax in Australia, it is also necessary to consider any applicable double tax agreement. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

Application to your circumstances

Regular payments received in the nature of insurance or compensation payments are not specifically dealt with in the articles of double tax agreements.

Article 15 of the Agreement between the Government of Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and protocol considers 'income from employment'.

Article 18 of the Agreement between the Government of Australia and Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and protocol considers 'pensions and annuities'. The pensions referred to are such which are provided under the provisions of a public social security system. As your monthly compensation payments from the insurer are paid as a substitute for loss of income which was previously received as employment income, they are considered replacement of ordinary income and not a public social security pension.

Therefore, the compensation payments you receive from the insurer will be assessable in Australia under Article 15 even when you move to Country A and may become a non-resident of Australia.