Private ruling: Assessability of your disability benefit
Date of advice: 8 October 2015
Published: October 2015
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018
Date scheme commenced: 1 January 20XX

Ruling: Questions and Answers: | 1. Are you a resident of Australia for income tax purposes? | Yes. | 2. Is your disability benefit that you receive from Country Y assessable in Australia? | Yes.

Relevant facts and circumstances: You were born in the Country Z and are a citizen of the Country Z. After marrying an Australian national you moved to Australia. A number of years later you became an Australian citizen. You have independent adult children. Your assets in Australia include a home, car, furnishings etc. You do not have any overseas assets. You have not left Australia for a number of years and have no intention to do so in the future. Disability benefit Prior to your arrival in Australia you worked in Country Y for private enterprise. You have been in receipt of a Country Y disability pension. This pension was tax free and paid on a monthly basis. After a number of years, the Country Y Authorities replaced the disability pension with a disability benefit. The result of this change was that the disability benefit is taxed by the Country Y Authorities as income. You have had tax withheld from your disability payment after this change. You have continued to receive this payment on a monthly basis.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 995-1 | Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Subsection 6-5(2) | International Tax Agreements Act 1953 Article 17

Reasons for decision: Detailed Reasoning - Residency: Section 995-1 of the Income tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. The tests are: • the resides test, • the domicile (and permanent place of abode) test, • the 183 day test, and • the superannuation test. The first two tests are examined in detail in TAXATION RULING NO. IT 2650 INCOME TAX: Residency - Permanent Place Of Abode Outside Australia . The latter two tests are relatively self-explanatory as they require the individual to either be physical present in Australia for a period greater than 183 days or be eligible to contribute to the PSS or CSS superannuation schemes. An individual need only satisfy the conditions of one of the four tests to be deemed a resident of Australia for income tax purposes. | Detailed Reasoning - The resides test: The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes its ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936. In Dempsey and Commissioner of Taxation [2014] AATA 335 (29 May 2014) (Dempsey's case) the Administrative Appeals Tribunal noted that the settled position of the courts (at ultimate appellant level) as to the meaning of the word resides in the ITAA 1936 is that the word: bears its ordinary English meaning, which is "to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place". Based on the facts of your case, you are a resident of Australia according to the ordinary meaning of the word. Significant in reaching this conclusion is that you have remained in Australia for many years and have no intention of departing. Further you own a home that you live in as well as a car, furnishing etc. This behaviour is consistent with having a permanent, settled or usual abode in Australia. Therefore consistent with the principles established in Dempsey's case you are a resident of Australia under this test. Whilst it is not necessary to meet more than one test to determine residency for tax purposes (we have already established that you are a resident under the resides test), we will also include a discussion of the 'domicile and permanent place of abode' test as an alternative argument. | Detailed Reasoning - The domicile test: Under this test, a person whose domicile is in Australia will be considered a resident of Australia for taxation purposes, unless the Commissioner is satisfied the person's permanent place of abode is outside Australia. In your case, your domicile of origin is Country Z. You moved to Australia and became a citizen of Australia, therefore electing Australia as you domicile of choice. In the preceding years you have not elected any new domicile or re-established your Country Z domicile. Therefore your Australian domicile has remained unchanged. From the information that you have provided you do not have a permanent place of abode outside of Australia. As it has been established that you have an Australian domicile and you do not have a permanent place of abode outside of Australia, you are a resident of Australia under the domicile test. | Detailed Reasoning - Your residency status: Accordingly, as it has been determined that you are a resident of Australia under both the 'Resides' and 'Domicile' tests, you are a resident of Australia for income tax purposes under section 995-1 of the ITAA 1997 and subsection 6(1) of the ITAA 1936. | Detailed Reasoning - Foreign disability benefit: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes income according to ordinary concepts (ordinary income) derived directly or indirectly from all sources, whether in or out of Australia during an income year. The disability benefit that you receive is a regular periodical payment, it is expected and also relied upon. Therefore this benefit is considered ordinary income according to ordinary concepts and is assessable under section 6-5 of the ITAA 1997. Accordingly, the disability benefit that you receive from the Country Y Authorities is assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Double Tax Agreements (DTA): In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y Agreement is listed in section 5 of the Agreements Act. The Country Y Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country Y Agreement operates to avoid the double taxation of income received by residents of Australia and Country Y. | Detailed Reasoning - Pensions and annuities: Article 17(1) of the Country Y Agreement advises that pensions and annuities paid to a resident of Australia shall only be taxable in Australia. Article 17(2) of the Country Y Agreement states that the term annuity means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time. Taxation Determination TD 93/151: Income tax: are periodic workers' compensation payments made by Comcare, 'pensions' for purposes of the pensions articles in Australia's double taxation agreements (DTAs)? , provides the Commissioners interpretation of what is defined as a pension for the purpose of double tax agreements. Paragraph 1 of Taxation Determination TD 93/151 states; ' The term "pension" is not defined in any of the DTA's and therefore takes the meaning it has under domestic law. 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 Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.' In your case your disability benefit that you receive from the Country Y Authorities falls under the definition of an annuity under Article 17(2) of the Country Y Agreement and/or a pension as defined by the Macquarie Dictionary. As you are a resident of Australia and not a resident of Country Y, the disability benefit that you are in receipt of is only taxable in Australia under Article 17(1) of the Country Y Agreement. | Detailed Reasoning - Conclusion: You are a resident of Australia for income tax purposes therefore your Country Y disability benefit that you are in receipt of is assessable in Australia. Under Article 17(2) of the Country Y Agreement and the definition provided by the Macquarie Dictionary, the disability benefit that you receive falls under the definition of an annuity/pension. Therefore as you are exclusively a resident of Australia and are in receipt of this payment, it is only taxable in Australia under Article 17(1) of the Country Y Agreement.