Private ruling: Assessable income - Australian source
Date of advice: 8 March 2023
Published: 24 April 2023
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Do the benefit payments received under a salary continuance policy have an Australian source and will they continue to have an Australian source after you cease the be a resident of Australia? | A1: Yes. | Q2: Are you considered to be exercising your employment in Australia after ceasing to be a resident of Australia for the purpose of the Treaty between Australia and Country Y? | A2: Not applicable, as you are no longer employed. | Q3: Will the benefits to be received by you under a salary continuance policy be assessable in Australia under the Tax Treaty between Australia and Country Y after you cease to be a resident of Australia? | A3: Yes.

Relevant facts and circumstances: You are currently a resident of Australia for taxation purposes. You were employed in Australia. Your former employer arranged for salary continuance insurance for its key employees, of which you were one. You reduced your working hours from January XXXX due to a diagnosed medical condition. You made a claim under the salary continuance insurance policy. The claim was accepted, and you received a partial monthly benefit payment from January XXXX in respect of the policy. You continued to be employed up until March XXXXX when you were forced to cease working and you resigned due to the previously diagnosed medical condition. You made a claim under the salary continuance insurance policy with the Insurer. The claim was accepted in October XXXX, and you have since been receiving a full monthly benefit payment in respect of the policy. The insurer is deducting PAYG withholding from the benefit payments to you. You intend on moving to Country Y to live permanently and will cease to be an Australian tax resident. You have been advised that the Insurer will continue to pay you benefits after you leave Australia. The insurer is located in Australia. The insurer is a resident of Australia.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | International Tax Agreements Act 1953

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source. You receive monthly payments from a salary continuance policy in Australia. These payments are ordinary income. You intend on moving to Country Y and will become a non-resident of Australia. The monthly payments you receive from the salary continuance policy are assessable income if they are sourced in Australia. However, they are not assessable income if they are sourced outside of Australia, as per subsection 6-15(1), as it would not be ordinary income to which subsection 6-5 of the ITAA 1997 applies and there is no statutory provision which would make the payments assessable. In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189-190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact. As stated by Bowen J in Federal Commissioner of Taxation v. Efstathakis (1979) 9 ATR 867; 79 ATC 4256 (the Efstathakis Case) at ATR 870; ATC 4259, to determine source: ... the answer is not to be found in the cases, but the weighing of the relative importance of the various factors which the cases have shown to be relevant. As per the relevant court cases, source cases concerning the provision of personal services are decided by weighing up the outcomes of the considerations of the following three factors (with the weighting given to each determined by their relevance to the case): • the place where the contract of employment is entered into, • the place where the remuneration is payable, and • the place where the services are performed. In your case: • The policy contract with the insurer was entered into in Australia. • The salary continuance payments you receive from the insurer are paid from Australia. • Australian law applies to the contract. • You are no longer working and are not providing any employment services. Therefore, the source of the income you receive from the insurer is Australia and will remain so even if you become a non-resident of Australia. In determining your liability to pay tax in Australia, it is also necessary to consider any applicable double tax agreement. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law. Regular payments received in the nature of insurance or compensation payments are not specifically dealt with in the articles of double tax agreements. Article XX of the Agreement between the Government of Australia and the Government of Country Y for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (The Country Y Agreement) considers 'other income' not dealt with in any other articles of the Agreement. Therefore, the payments you receive from the salary continuance insurance policy will be assessable in Australia under Article XX even when you move to Country Y and become a non-resident of Australia.