Edited version of private advice

Authorisation Number: 1052378196879

Date of advice: 26 March 2025

Ruling

Subject: Assessable income

Question 1

Where the Damages are paid as periodical payments, will the payments constitute ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) to the extent that the payments are specified as being awarded for future personal care and assistance of a disabled person?

Answer 1

Yes.

Question 2

Where the Damages are paid as periodical payments, will the payments constitute ordinary income under section 6-5 of the ITAA 1997 to the extent that the payments are specified as being awarded for future costs in respect of household tasks to be undertaken on behalf of a disabled person?

Answer 2

Yes.

This ruling applies for the following period:

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are currently living in Country Z and are a resident of Country Z for taxation purposes.

You suffered serious injuries in an accident several years ago.

You were left permanently disabled.

You were a resident of Country Z at the time of the accident.

The accident occurred in Country Y.

Several years after the accident, a Court handed down a judgement in your favour in respect of compensation.

The judgement provided a detailed award of damages on a dissected basis.

The judgement was handed down in a foreign language, an English language summary from the acting solicitor was lodged with the private ruling request.

Included in the judgement are a number of annuities awarded to cover ongoing costs:

You are considering returning to Australia and resuming your residency status with Australia for taxation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

International Tax Agreements Act 1953

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 payments which are periodic 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 which relate to your disability.

The payments are paid to you for your future personal care and assistance of a disabled person, along with future costs in respect of household tasks to be undertaken on behalf of a disabled person.

The regularity of the payments and the full circumstances surrounding your case indicate an income nature. The periodic payments are expected and relied upon.

Your periodic 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 in Australia if you resume your residency status in Australia.

The International Tax Agreements Act 1953 (the Agreements Act) contains the tax treaty between Australia and Country Z.

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

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).

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