Private ruling: Compensation
Date of advice: 7 November 2017
Published: March 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2016

Ruling: Q1: Are the fortnightly payments you receive from XYZ the assessable in Australia? | A1: No | Q2: Are you entitled to a refund of the tax which has been withheld by the XYZ as shown on your payment summary? | A2: Yes

Relevant facts and circumstances: You are a resident of Country X. You are a Country X tax resident. You came to visit Australia and were involved in a motor vehicle accident. You submitted a claim for loss of earnings to the XYZ. XYZ accepted your claim. You receive fortnightly payments from the XYZ. The fortnightly payment is an ongoing payment subject to a maximum term of 18 months; tax has been withheld from the payments.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(3) | International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. 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 (the Agreements Act). Section 4 of the Agreements Act incorporates the Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one. 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 X Convention is listed in section 5 of the Agreements Act. The Convention is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. It operates to avoid the double taxation of income received by residents of Australia and Country X. Article 17 of the Convention provides that pensions paid to a resident of one of the Contracting State shall be taxable only in that State. Therefore, pensions paid from Australia to a resident of Country X shall be taxable only in Country X. Article 3(3) of the Convention provides that as regards the application of the Convention at any time by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning that it has at that time under the law of that State concerning the taxes to which the Convention applies, any meaning under the applicable tax law of that State prevailing over a meaning given to the term under other law of that State. The term ‘pension’ is not defined in the Convention or in Australia’s domestic taxation law. 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)? discusses the meaning of a ‘pension’ for tax treaty purposes. 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. and 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. FC of T 93 ATC 4207 (Tubemakers). His Honour concluded that the essential characteristic of a ‘pension’ is periodic payments. The loss of earnings payments made to you 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. Therefore, the Pension Article applies to give Country X, as the country of your residence, sole taxing rights over the payment received by you from the XYZ. In your case, you will need to inform the XYZ that you are a resident of Country X and the income is not assessable in Australia. Thus tax should not be withheld in Australia from the payments made to you. You are entitled to a refund of the tax which has been withheld by the XYZ. | Detailed Reasoning - Further information: In order to receive a refund of the tax which has been deducted by the XYZ, it will be necessary for you to apply for an Australian tax file number and then lodge a tax return in Australia showing nil income and showing the amount of tax which has been withheld.