Issue
Are monthly compensation payments from Chile received by an Australian resident taxpayer included in assessable under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The monthly compensation payments from Chile are ordinary income and assessable under section 6-5 of the ITAA 1997.
Facts
The taxpayer is an Australian resident for income tax purposes.
The taxpayer is in receipt of monthly compensation payments paid under a law passed by the Chilean Government - law number 19234 ' Ley de reconocimiento al Exonerado Politico ' (Law of Recognition to the Politically Exonerated).
The taxpayer receives the monthly compensation payments because they lost their job during the 1973 Chilean political coup. The amount of pension the taxpayer receives is the equivalent of the pension the taxpayer would have received if they had continued working until retirement age.
Reasons for Decision
Subsection 6-5(2) of the ITAA provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. 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.
The taxpayer's monthly compensation payment is expected (and perhaps relied upon) as their entitlement to the payment arises under the ' Ley de reconocimiento al Exonerado Politico '. It has an element of recurrence and regularity as it is paid monthly.
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) 5 AITR 443; (1952) 10 ATD 82). The monthly amount is paid to the taxpayer to compensate the taxpayer for the loss of employment and the corresponding loss of a retirement pension and can also be characterised as income.
Accordingly, the monthly compensation payments received by the taxpayer are considered ordinary income and are assessable under section 6-5(2) of the ITAA 1997. Note: there is no double tax agreement between Australia and Chile.