ATO Interpretative Decision

ATO ID 2010/68

Income Tax

Lump sum payments received by a foreign resident as arrears of past periodic payments and the Pension Article of the Italian Convention
FOI status: may be released
  • This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
    Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

Does Article 18, the Pensions and Annuities Article (the Pension Article) of the tax convention between Australia and the Republic of Italy (the Italian Convention), apply to lump sum payments received by a resident of Italy as arrears of past periodic payments under section 44 or section 45 of the Transport Accident Act 1986 (Vic) (TAA 1986)?

Decision

Yes. The Pension Article of the Italian Convention applies to lump sum payments received by a resident of Italy as arrears of past periodic payments under section 44 or section 45 of the TAA 1986.

Facts

The taxpayer is a foreign resident for Australian tax purposes and a resident of Italy for the purposes of the Italian Convention.

The taxpayer received a lump sum payment from Australia.

The lump sum payment represents arrears of periodic loss of earnings payments from Australia as a result of injury suffered in a transport accident in the State of Victoria.

The lump sum payment comprised weekly statutory compensation payments made by the Victorian Transport Accident Commission (TAC) under section 44 or section 45 of the TAA 1986 for loss of income due to the injury, which should have been paid periodically over a period of time.

Reasons for Decision

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

The loss of earnings payments 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 (Agreements Act).

Schedule 21 of the Agreements Act contains the Italian Convention. The Italian Convention operates to avoid double taxation of income received by residents of Australia and residents of Italy.

Article 18(1) of the Italian Convention provides that pensions (including government pensions) and annuities paid to a resident of one of the Contracting States shall be taxable only in that State. Therefore, pensions paid from Australia to a resident of Italy shall be taxable only in Italy.

Article 3(3) of the Italian Convention provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which this Convention applies. The term 'pension' is not defined in the Italian Convention or in Australia's domestic taxation law.

Taxation Determination TD 93/151 discusses the meaning of a 'pension' for tax treaty purposes in the context of workers compensation payments. Paragraph 1 of TD 93/151 states that 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 also considered by Hill J. in the Federal Court in Tubemakers of Australia Ltd v. Federal Commissioner of Taxation 93 ATC 4207; (1993) 25 ATR 183 (Tubemakers). His Honour concluded that the essential characteristic of a 'pension' is periodic payments.

The loss of earnings payments made under section 44 or section 45 of the TAA 1986 have the essential characteristic of a 'pension' as per Hill J. in Tubemakers and fall within The Macquarie Dictionary definition of 'pension' as they are fixed periodic payments made in consideration of injury or loss sustained.

In the present case, an amount made to the taxpayer as a lump sum representing arrears of unpaid periodic loss of earnings payments by the TAC under section 44 or section 45 of the TAA 1986 is also a 'pension' for the purposes of the Pension Article of the Italian Convention. This is because the lump sum amount represents the aggregate of past loss of earnings payments that should have been made on a periodic basis over a particular period of time.

Therefore, the Pension Article applies to give Italy, as the country of residence of the taxpayer, sole taxing rights over the compensation payment.

Note : the above analysis also applies to the Pension Article of the majority of Australia's tax treaties, particularly those that do not have a specific treaty definition of the term 'pension'. However, the terms of the relevant treaty must be considered in each case.

Date of decision:  4 March 2010

Year of income:  Year ended 30 June 2007 Year ended 30 June 2008 Year ended 30 June 2009 Year ended 30 June 2010

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

International Tax Agreements Act 1953
   Schedule 21
   Schedule 21, Article 3(3)
   Schedule 21, Article 18(1)

Transport Accident Act 1986 (Vic)
   section 44
   section 45

Case References:
Tubemakers of Australia Ltd v Federal Commissioner of Taxation
   93 ATC 4207
   25 ATR 183

Related Public Rulings (including Determinations)
Taxation Determination TD 93/151

Related ATO Interpretative Decisions
ATO ID 2003/178
ATO ID 2008/145

Other References:
The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW.

Keywords
Double tax agreements
Italy
International tax
Lump sum payments

Siebel/TDMS Reference Number:  1-1WUVJ1S

Business Line:  International Centre of Expertise

Date of publication:  19 March 2010

ISSN: 1445-2782