Private ruling: Overseas compensation payment
Date of advice: 17 August 2016
Published: September 2016
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Are the compensation payments you receive considered to be assessable income in Australia? | A1: Yes

Relevant facts and circumstances: You are an Australian resident for income tax purposes. Prior to moving to Australia you were dismissed from your job in the overseas country after you went on strike. You have been awarded compensation by the government of the overseas country. You began receiving monthly compensation payments in the relevant period and they will continue for life. The compensation was granted under a law declaring political amnesty to people in various situations who were punished for political reasons in the overseas country. You have provided a translation of the applicable law. The translation provides that the compensation payment is equal to the salary you would earn if you had continued working in the same activity. There is provision for a back payment which can go back a certain number of years. The amounts paid to you as compensation are exempt from income tax in the overseas country.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 6-10 | Income Tax Assessment Act 1936 section 159ZRA

Reasons for decision: Detailed Reasoning - Ordinary income: Section 6-5 and section 6-10 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a taxpayer includes ordinary and statutory income derived directly and indirectly from all sources during the income year. Ordinary income has generally been held to include three 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 or relied upon • have an element of periodicity, recurrence or regularity • replace income. It is not necessary for all of these characteristics to exist for money received to be ordinary income. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In your case you have been awarded monthly compensation payments from the government of the overseas country as a result of your dismissal from your job. These payments retain the characteristics of income as they are expected, relied upon and have the element of recurrence or regularity. The compensation is for the loss of earnings. Therefore, the amounts paid to you to compensate you for loss of earnings is assessable as ordinary income under subsection 6-5(2) of the ITAA 1997 in the income year it was received. | Detailed Reasoning - Exempt income: An amount of ordinary income can be exempt from income tax only if a specific provision within the taxation legislation or other Commonwealth law states that it is exempt from income tax. Some foreign payments, for example, certain war time compensation payments are specifically exempted. There are no provisions within the Income Tax Assessment Act 1936 (ITAA 1936) or the ITAA 1997 which exempt the overseas compensation payment received by an Australian resident taxpayer. | Detailed Reasoning - Overseas income: Australia has double tax agreements with more than 40 countries worldwide. The main purpose of double tax agreements is to avoid double taxation as well as to prevent taxation evasion. In addition, these agreements often settle differences of interpretation and provide a system for consultation and resolution of disputes between the tax administrations of Australia and another country. In determining liability to tax on foreign sourced income received by an Australian resident taxpayer 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 . If there is no relevant tax treaty, the income will be taxed according to Australian income tax laws. In this case the overseas country does not currently have a tax treaty with Australia and therefore the assessability of the income you receive from the overseas country is determined on the basis of Australian income tax law. Accordingly, the compensation payments you receive from the overseas country are ordinary income and are assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Other comments: Lump sum in arrears tax offset Individual taxpayers, who receive eligible assessable lump sum payments containing an amount that accrued in earlier income years, may be entitled to a lump sum in arrears tax offset under section 159ZRA of the ITAA 1936.The tax offset is intended to overcome the problem of the lump sum attracting more tax in the year of receipt than would have been payable if the payment had been taxed in each of the years in which it accrued. Salary and wages may qualify for the rebate, but only where payment is received if an amount that accrued more than 12 months before the payment date. To be eligible for the tax offset, the amount of the eligible lump sum that accrued before the year of receipt must not be less than 10% of the 'normal taxable income' of the year of receipt. You may be entitled to a lump sum in arrears tax offset. The exact entitlement to a tax offset cannot be calculated until you lodge the relevant year's income tax return. If applicable, you may also need to attach additional information to show the amount of the payment in arrears for each income year involved.