Private ruling: Source and assessability of income protection payments
Date of advice: 17 February 2021
Published: April 2021
Ruling period: Year ending 30 June 2021
Date scheme commenced: 1 July 2020

Ruling: Q1: Will the payments you receive from an income protection policy have an Australian source, and will they be included in your Australian assessable income? | A1: Yes

Relevant facts and circumstances: You are a non-resident of Australia for tax purposes. You currently reside in Country X but work in another country on a fly-in fly-out basis. While you were still a resident of Australia, you took out an income protection policy in Australia and maintained the policy after you left Australia. You were recently injured at work and made a claim under the policy which was accepted. You will receive payments under the policy for a period of time.

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 the assessable income of a foreign resident includes the ordinary income derived directly or indirectly from all Australian sources during the income year. Payments of salary and wages are income according to ordinary concepts and are included in assessable income. Likewise, payments in the nature of compensation which are a substitute for salary and wages have been held by the courts to be income under ordinary concepts. In your case, the payments you will receive under the policy will be paid from an entity resident in Australia and will be made under the terms of a contract originally entered into in Australia. Therefore, the payments will be ordinary income from an Australian source and will be included in your assessable income under section 6-5 of the ITAA 1997. However, as you are a resident of Country X, it is also necessary to see if the double tax agreement with Country X alters Australia's ability to tax the payments. The agreements that Australia has with various countries under the International Tax Agreements Act 1953 (Agreements Act) operates to prevent the double taxation of income. Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that both Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions. Payments in the nature of income protection or compensation payments are not expressly mentioned in the agreement with Country X, so Article X is the relevant article to consider: Items of income which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable according to the laws of the respective Contracting States relating to tax. From the above, the agreement with Country X does not prevent Australia taxing the payments you will receive under the policy.