ATO ID 2007/27: Assessability of periodic insurance payments received by an Australian resident from Denmark
Date of decision: 19 January 2007
Year of income: Year ended 30 June 2004 Year ended 30 June 2005 Year ended 30 June 2006
Business line: Public Groups and International

Issue
Are the foreign insurance payments received by a resident of Australia from a Danish pension and insurance company assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The foreign insurance payments received by a resident of Australia from a Danish pension and insurance company are assessable income under subsection 6-5(2) of the ITAA 1997.

Facts
The taxpayer is an Australian resident for income tax purposes. The taxpayer and the taxpayer's employer contributed to an insurance policy issued by a Danish pension and insurance company. The taxpayer receives periodic insurance payments from the Danish pension and insurance company when the taxpayer's ability to work was reduced by a certain percentage. The purpose of the payments was to provide a regular source of income to financially support the taxpayer while the taxpayer's ability to work was reduced.

Reasons for decision
Summary: 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, whether in or out of Australia, during the income year. Subsection 27A(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines a pension to mean a pension within the meaning of the Superannuation Industry (Supervision) Act 1993 or a pension within the meaning of the Retirement Savings Accounts Act 1997 . However, those definitions refer to specific requirements imposed under Australian superannuation law. The Commissioner has issued Taxation Determination TD 93/151 which 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 , 2001, 3 rd edn, The Macquarie Library Pty Ltd, NSW 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. F C of T 93 ATC 4207; (1993) 25 ATR 183. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments. The payments received by the taxpayer acquire the characteristic of a pension as they were fixed periodical payments made to replace earnings normally earned by the taxpayer during the period the taxpayer's ability to work was reduced. As the taxpayer's pension payments were received from Denmark, 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). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997, so that those Acts are read as one. Schedule 18 of the Agreements Act contains the tax treaty between Australia and the Kingdom of Denmark (the Danish Agreement). The Danish Agreement operates to avoid the double taxation of income received by Australian and Danish residents. Article 18(1) of the Danish Agreement provides that subject to Article 18(3) a pension payable to a resident of Australia shall be taxable only in Australia. As the pension is not paid in respect of services rendered to the Danish Government, Article 18(3) of the Danish Agreement does not apply. Consequently, as the taxpayer is a resident of Australia, Article 18(1) of the Danish Agreement applies and the pension payments are assessable under subsection 6-5(2) of the ITAA 1997.

Legislative references: Income Tax Assessment Act 1936 subsection 27A(1)
Case references: Tubemakers of Australia Ltd v. FC of T 93 ATC 4207 (1993) 25 ATR 183
Related public rulings and determinations: Taxation Determination TD 93/151
Related ATO interpretative decisions: ATO ID 2002/175 | ATO ID 2003/1056 | ATO ID 2005/283
Other references: The Macquarie Dictionary, 2001, rev. 3rd edn, The Macquarie Library Pty Ltd, NSW
Subject references: Disability superannuation pension Denmark Exempt income Foreign income International tax Insurance Periodical sickness or accident compensation payments