Private ruling: International - foreign income
Published: February 2015
Ruling period: 1 July 2014 to 30 June 2015 | 1 July 2015 to 30 June 2016 | 1 July 2016 to 30 June 2017 | 1 July 2017 to 30 June 2018 | 1 July 2018 to 30 June 2019 | 1 July 2019 to 30 June 2020

Ruling: Questions and answers | 1. Will annual periodic payments paid by an overseas based insurance provider be assessable income in Australia, when you repatriate to Australia and became an Australian resident for taxation purposes? | Yes. | 2. Will annual periodic payments, paid by an overseas based insurance provider, after you repatriate to Australia permanently, be exempt from tax in Australia on the basis that they are a structured settlement or structured order under Division 54 of the Income Tax Assessment Act 1997 ? | No. | 3. Under the circumstance where an overseas based insurance provider purchases an annuity from an Australian life insurance company, in order to provide you with the annual periodic payments, after you repatriate to Australia; will the payments be exempt from tax in Australia on the basis that they are a tax exempt structured settlement or structured order under Division 54 of the Income Tax Assessment Act 1997 ? | No.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You are an Australian citizen and domiciled person who has been residing overseas. You are currently a non-resident of Australia for taxation purposes. You were the victim of an accident where you suffered serious trauma and consequently are suing the defendant for personal injury compensation. You will require care and assistance for the rest of your life. There is no dispute regarding negligence and accordingly there is no contributory negligence attributable to you. The case has not yet been settled and is considered an on-going negotiation. You expect the case will be settled shortly. You intend to return to Australia permanently in approximately 4 to 5 years' time and you will resume Australian taxation resident status. You believe the compensation will be paid to you by way of an upfront lump sum prior to your repatriation to Australia and continuing periodic payments that will be remitted annually to you. The periodic payments are not instalments of a fixed sum. You expect the annual periodic payments will be payable to you until your death with no reversionary benefit to pass to any other individual on your death. The periodic payment will be in compensation of your ongoing future care and case management directly resulting from your injuries. No part of the compensation is for loss of future earnings. Since the accident you have not been able to return to meaningful employment.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 subsection 54-10(1) | Income Tax Assessment Act 1997 subsection 54-10(1)(e) | Income Tax Assessment Act 1997 Subsection 54-10(2) | Income Tax Assessment Act 1997 subsection 54-40(1) Reason for decision | Question 1 | Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). | Ordinary income has generally been held to include 3 categories, namely income from rendering personal services, income from property and income from carrying on a business. | Other characteristics of income that have evolved from case law include receipts that: | • are earned; | • are expected; | • are relied upon; and | • have an element of periodicity, recurrence or regularity. | Application to your circumstances | You will be receiving compensation payments from an overseas base insurance company, when you repatriate to Australia, they will provide you with an annual income stream, the payments will be expected, relied upon and be periodic. | Accordingly, the compensation payments will be assessable under section 6-5 of the ITAA 1997. | Question 2 | Under Division 54 or the ITAA 1997 there is an exemption for certain payments made under structured settlements and structured orders. | Section 54-10(1) states a structured settlement is settlement of a claim that satisfies the following conditions; | (a) the claim: | (i) is for compensation or damages for, or in respect of, personal injury suffered by a person (the injured person ); and | (ii) is made by the injured person or by his or her legal personal representative; | (b) the claim is based on the commission of a wrong, or on a right created by statute; | (c) the claim is made against a person (the defendant ) and satisfies the following conditions: | (i) the claim is not made against the defendant in his or her capacity as an employer, or associate of an employer, of the injured person; | (ii) the claim is not made under a workers' compensation law, and is not made as an alternative to a claim under such a law; | (d) the settlement takes the form of a written agreement between the parties to the claim (whether or not that agreement is approved by an order of a court, or is embodied in a consent order made by a court); | (e) under the terms of the settlement, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more life insurance companies or State insurers: | (i) an annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or | (ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person. | Application to your circumstances | You are a victim of an accident where you suffered serious trauma and are suing the defendant for personal injury compensation. | Accordingly you meet condition (a) and (b). | The defendant is not your employer or an associate of your employer. The accident you suffered was in no way connected with your employment. | Accordingly you meet condition (c). | The settlement will be a written agreement between you and the relevant party/ies. | Accordingly you meet condition (d). | The overseas based insurance provider is not an Australian Life Insurance Company or State insurer. | Therefore, you do not meet condition (e). | Consequently, the periodic payments you will receive annually will not be exempt from taxation in Australia, once you have repatriated to Australia. | Under Division 54 of the ITAA 1997 the Commissioner does not have any discretion to treat the payments that are being made by the overseas based insurance company as if they are coming from an Australia insurance company. | Question 3 | Under subsection 54-10(1)(e) | (e) under the terms of the settlement, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more life insurance companies or State insurers: | (i) an annuity or annuities to be paid to the injured person, or to a trustee for The benefit of the injured person; or | (ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person. | There is a requirement for the annuity to provide a minimum monthly level of support and under subsection 54-40(1) of the ITAA 1997 it states; | Either: | (a) the annuity instrument must provide; or | (b) if there is more than one annuity provided under the structured settlement or structured order - the annuity instruments for all of those annuities that satisfy the other conditions in this Subdivision, taken as a whole, must provide; | that at least once a month for the life of the *injured person, he or she is to be paid an amount that equals or exceeds the minimum monthly level of support. | Life Insurance Company | The term life insurance company is defined in subsection 995-1(1) of the ITAA 1997 to mean a life insurance company registered under the Life Insurance Act 1995 (LIA). For a company to be registered under the LIA, the Australian Prudential Regulation Authority (APRA) must issue a certificate to the company stating that the company is registered and specifying the date on which it was registered (subsection 21(5) of the LIA). Where a foreign insurer conducts life insurance business in Australia, an Australian subsidiary may be registered under the LIA. State insurer | Section 5 of the LIA reads; | This Act does not apply with respect to State insurance that does not extend beyond the limits of the State concerned. A State insurer is defined in subsection 54-10(2) of the ITAA 1997 as a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Australian Constitution. Paragraph 51(xiv) provides the Federal Parliament with power to make laws with respect to 'insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned'. | The effect of these provisions is that life insurance business is governed by the LIA except where State insurance is carried on within the territorial boundaries of the State concerned. Such insurance is governed by the provisions of the relevant State act or regulations. | As a foreign life insurance company conducting business outside Australia is neither registered under the LIA nor a State insurer; an annuity taken out with a foreign life insurance company does not qualify for exemption under Division 54 of the ITAA1997. | Application to your circumstances | Division 54 of the ITAA 1997 does not specifically state that the purchaser of an Australian insurance annuity must be an Australian resident. Therefore, an overseas based insurance provider would not be precluded from purchasing an Australian annuity under Division 54 of the ITAA 1997. | However, although an overseas based insurance provider may purchase an Australian annuity, after you repatriate to Australia, the periodic payments you will be receiving, will be made on an annual basis and not monthly, as required under subsection 54-40(1) of the ITAA 1997. | Consequently, you would not meet the condition under subsection 54-10(1)(e) of the ITAA 1997 and will not be exempt from taxation in Australia.

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income). Ordinary income has generally been held to include 3 categories, namely income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: • are earned; • are expected; • are relied upon; and • have an element of periodicity, recurrence or regularity. | Detailed Reasoning - Application to your circumstances: You will be receiving compensation payments from an overseas base insurance company, when you repatriate to Australia, they will provide you with an annual income stream, the payments will be expected, relied upon and be periodic. Accordingly, the compensation payments will be assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Question 2: Under Division 54 or the ITAA 1997 there is an exemption for certain payments made under structured settlements and structured orders. Section 54-10(1) states a structured settlement is settlement of a claim that satisfies the following conditions; (a) the claim: (i) is for compensation or damages for, or in respect of, personal injury suffered by a person (the injured person ); and (ii) is made by the injured person or by his or her legal personal representative; (b) the claim is based on the commission of a wrong, or on a right created by statute; (c) the claim is made against a person (the defendant ) and satisfies the following conditions: (i) the claim is not made against the defendant in his or her capacity as an employer, or associate of an employer, of the injured person; (ii) the claim is not made under a workers' compensation law, and is not made as an alternative to a claim under such a law; (d) the settlement takes the form of a written agreement between the parties to the claim (whether or not that agreement is approved by an order of a court, or is embodied in a consent order made by a court); (e) under the terms of the settlement, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more life insurance companies or State insurers: (i) an annuity or annuities to be paid to the injured person, or to a trustee for the benefit of the injured person; or (ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person. | Detailed Reasoning - Application to your circumstances: You are a victim of an accident where you suffered serious trauma and are suing the defendant for personal injury compensation. Accordingly you meet condition (a) and (b). The defendant is not your employer or an associate of your employer. The accident you suffered was in no way connected with your employment. Accordingly you meet condition (c). The settlement will be a written agreement between you and the relevant party/ies. Accordingly you meet condition (d). The overseas based insurance provider is not an Australian Life Insurance Company or State insurer. Therefore, you do not meet condition (e). Consequently, the periodic payments you will receive annually will not be exempt from taxation in Australia, once you have repatriated to Australia. Under Division 54 of the ITAA 1997 the Commissioner does not have any discretion to treat the payments that are being made by the overseas based insurance company as if they are coming from an Australia insurance company. | Detailed Reasoning - Question 3: Under subsection 54-10(1)(e) (e) under the terms of the settlement, some or all of the compensation or damages is to be used by the defendant (or by a person with whom the defendant has insurance against the liability to which the claim relates) to purchase from one or more life insurance companies or State insurers: (i) an annuity or annuities to be paid to the injured person, or to a trustee for The benefit of the injured person; or (ii) such an annuity or annuities, together with one or more lump sums that are also to be paid to the injured person, or to a trustee for the benefit of the injured person. There is a requirement for the annuity to provide a minimum monthly level of support and under subsection 54-40(1) of the ITAA 1997 it states; Either: (a) the annuity instrument must provide; or (b) if there is more than one annuity provided under the structured settlement or structured order - the annuity instruments for all of those annuities that satisfy the other conditions in this Subdivision, taken as a whole, must provide; that at least once a month for the life of the *injured person, he or she is to be paid an amount that equals or exceeds the minimum monthly level of support. | Detailed Reasoning - Life Insurance Company: The term life insurance company is defined in subsection 995-1(1) of the ITAA 1997 to mean a life insurance company registered under the Life Insurance Act 1995 (LIA). For a company to be registered under the LIA, the Australian Prudential Regulation Authority (APRA) must issue a certificate to the company stating that the company is registered and specifying the date on which it was registered (subsection 21(5) of the LIA). Where a foreign insurer conducts life insurance business in Australia, an Australian subsidiary may be registered under the LIA. | Detailed Reasoning - State insurer: Section 5 of the LIA reads; This Act does not apply with respect to State insurance that does not extend beyond the limits of the State concerned. A State insurer is defined in subsection 54-10(2) of the ITAA 1997 as a body that carries on State insurance, within the meaning of paragraph 51(xiv) of the Australian Constitution. Paragraph 51(xiv) provides the Federal Parliament with power to make laws with respect to 'insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned'. The effect of these provisions is that life insurance business is governed by the LIA except where State insurance is carried on within the territorial boundaries of the State concerned. Such insurance is governed by the provisions of the relevant State act or regulations. As a foreign life insurance company conducting business outside Australia is neither registered under the LIA nor a State insurer; an annuity taken out with a foreign life insurance company does not qualify for exemption under Division 54 of the ITAA1997. | Detailed Reasoning - Application to your circumstances: Division 54 of the ITAA 1997 does not specifically state that the purchaser of an Australian insurance annuity must be an Australian resident. Therefore, an overseas based insurance provider would not be precluded from purchasing an Australian annuity under Division 54 of the ITAA 1997. However, although an overseas based insurance provider may purchase an Australian annuity, after you repatriate to Australia, the periodic payments you will be receiving, will be made on an annual basis and not monthly, as required under subsection 54-40(1) of the ITAA 1997. Consequently, you would not meet the condition under subsection 54-10(1)(e) of the ITAA 1997 and will not be exempt from taxation in Australia.