Issue
Are worker's compensation payments received by an Australian resident in substitution of salary and wages that were exempt under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
No. The worker's compensation payments received by an Australian resident in substitution of salary and wages that were exempt under subsection 23AG(1) of the ITAA 1936 are not assessable under subsection 6-5(2) of the ITAA 1997.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is an employee of an Australian entity.
The taxpayer worked in a foreign country for a continuous period of not less than 91 days.
The taxpayer suffered an injury during the period of foreign service and was absent from service because of that injury.
The taxpayer continued to receive salary and wages during the absence.
The absence formed part of the taxpayer's period of foreign service under subsection 23AG(6) of the ITAA 1936.
The salary and wages received by the taxpayer were exempt under subsection 23AG(1) of the ITAA 1936.
Following the end of the period of foreign service, the taxpayer was required to repay the salary and wages received during the period of the absence.
The taxpayer subsequently received worker's compensation payments in substitution of the salary and wages that were required to be repaid.
None of the circumstances set out in subsection 23AG(2) of the ITAA 1936 apply.
Reasons for Decision
Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year.
Payments of salary and wages are income according to ordinary concepts for the purposes of subsection 6-5(2) of the ITAA 1997.
Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.
Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 23AG of the ITAA 1936 which deals with overseas employment income.
Subsection 23AG(1) of the ITAA 1936 provides that where a resident taxpayer is engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived from that foreign service will be exempt from tax in Australia. 'Foreign service' includes service in a foreign country in the capacity of an employee and 'foreign earnings' includes income consisting of salary and wages (subsection 23AG(7) of the ITAA 1936).
Foreign earnings do not need to be derived at the time of engaging in foreign service. The important test is that the foreign earnings, when derived, need to be derived as a result of the undertaking of that foreign service.
Salary and wages are not further defined in section 23AG of the ITAA 1936. However, the term is defined in section 221A of the ITAA 1936 in the context of the Pay As You Earn provisions.
The definition of salary and wages in paragraph 221A(1)(f) of the ITAA 1936 specifically includes payments by way of compensation or of sickness or accident pay in respect of incapacity for work, being payments calculated at a weekly or other periodical rate, but not including payments made under a policy of insurance to the owner of the policy.
Accordingly, the worker's compensation payments received by the taxpayer which arose because of the injury suffered while engaged in foreign service are foreign earnings for the purposes of subsection 23AG(7) of the ITAA 1936.
Subsection 23AG(2) of the ITAA 1936 provides that the exemption in subsection 23AG(1) of the ITAA 1936 will not apply where the income is exempt from tax in the foreign country only because of any of the reasons listed therein.
The worker's compensation payments are subject to tax in the foreign country as they represent income derived from employment exercised in the foreign country.
Therefore, as the worker's compensation payments are foreign earnings derived as a result of undertaking a continuous period of foreign service of not less than 91 days, and none of the exceptions set out in subsection 23AG(2) of the ITAA 1936 apply, the payments received by the taxpayer are exempt under subsection 23AG(1) of the ITAA 1936.