Private ruling: Compensation
Date of advice: 13 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2016 | Year ended 30 June 2017 | Year ended 30 June 2018 | Year ended 30 June 2019 | Year ended 30 June 2020
Date scheme commenced: 1 July 2015

Ruling: Question and answer | Are your compensation payments paid for lost salary and wages sourced in Country A taxable only in Australia? | Yes

Relevant facts and circumstances: You are an Australian resident. You were employed under contract by Company X in Country A. You made a compensation claim to an Australian insurer in relation to an injury you received whilst working in Country A. Your claim was accepted and compensation was awarded in the form of weekly benefits (paid monthly) due to time lost from work because of the injury, and also for reasonable and necessary medical treatment. You are in receipt of weekly compensation payments (paid monthly) as a result of the injury you received whilst working in Country A. The compensation payments have had tax withheld by Company X at the Country A rate of tax.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | International Tax Agreements Act 1953 (the Agreements Act).

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA1997) provides that the assessable income of an Australian resident includes the ordinary income they derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In your case, the compensation payments that you receive are made from an Australian insurer to you, an Australian resident, living in Australia. However, the salary and wages that the payments replace are salary and wages sourced in Country A. Thus it is necessary to consider relevant legislation and ATO views in relation to the taxation treatment of the compensation payments. In relation to compensation payments, an amount paid to compensate for loss generally acquires the character of that for which it is substituted ( Federal Commissioner of Taxation v Dixon (1952) 86 CLR 540; (1952) 10 ATD 82; (1952) 8 AITR 443). The payments that you receive from the Australian insurer are a substitute for salary and wages income that you would have received had you not been injured. As such, as salary and wages income is assessable, the payments are assessable under subsection 6-5(2) of the ITAA 1997. In this case, the salary and wages that the compensation payments replace were sourced in Country A, so it is also necessary to consider how this impacts the taxation treatment of the payments. In determining liability to tax on foreign sources income received by an Australian resident taxpayer it is necessary to consider not only the income tax laws but also any applicable double tax agreement (DTA) contained in the International Tax Agreements Act 1953 (the Agreements Act). Section 4 of the Agreement Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). The Agreements Act contains the DTA between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by Australian and Country A residents. In your case, it is necessary to establish how the payments received by you are categorised for the purposes of Australia's DTAs. Taxation Determination TD 93/15 is entitled Income tax: are periodic workers' compensation payments made by Comcare, 'pensions' for the purposes of the pensions articles in Australia's double taxation agreements (DTAs)? TD 93/15 deals with how periodic workers' compensation payments made by Comcare are characterised for the purposes of Australia's DTAs. Taxation Determination TD 93/151 provides at paragraph 1: The term 'pension' is not defined in any of the DTAs and therefore takes the meaning it has under domestic law. 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. 2. an allowance or annuity.' The meaning of the term 'pension' was considered by Hill J. in the Federal Court in Tubemakers of Aust Ltd v FC of T 93 ATC 4207. His Honour concluded that the essential characteristic of a pension is only that there be periodical payments.' Paragraph 1 of TD 93/151 goes on to provide that the Comcare payments are fixed periodical payments and that they are pensions within the ordinary meaning of that term and therefore fall within the Pensions Articles for the purposes of Australia's DTAs. While the compensation payments you receive are not paid by Comcare, they are similar to Comcare payments in that they are fixed periodical payments made in consideration of injury or loss sustained. As such the payments you receive are considered to be a pension for the purposes of the Country A Agreement. An Article in the Country A Agreement deals with the taxation treatment of pensions. It provides that pensions (including government pensions) paid to a resident of Australia are taxable only in Australia. As the compensation payments received by you are a 'pension' for the purposes of the Country A Agreement, they are therefore taxable only in Australia. The payments received by you are ordinary income and are assessable under section 6-5 of the ITAA 1997.