Issue
Are the workers' compensation payments received by an Australian resident deployed overseas, in substitution for salary and allowances, exempt from tax under subsection 23AG(1) of the Income Tax Assessment Act 1936 (ITAA 1936) where they are on a graduated return to work program in Australia?
Decision
Yes. The worker's compensation payments received by an Australian resident deployed overseas, in substitution for salary and allowances, are exempt from tax under subsection 23AG(1) of the ITAA 1936 where they are on a graduated return to work program in Australia.
Facts
The taxpayer is a resident of Australia for income tax purposes.
The taxpayer is an employee.
The taxpayer was deployed to an overseas country for a continuous period of not less than 91 days.
The taxpayer was injured during the deployment overseas.
The taxpayer returned to Australia on a standard four week break in accordance with the terms of deployment and received medical treatment.
The taxpayer was unfit to return to work in the overseas country while undertaking the medical treatment in Australia.
The taxpayer was under the deployment conditions of service while undertaking the medical treatment. The taxpayer returned to Australian based duties for a short period as part of a return to work rehabilitation program with medical certificate.
The taxpayer received workers' compensation payments from Comcare and part salary and allowances from the employer under the terms and conditions of their employment.
The taxpayer returned to the overseas deployment after being found fit for duty.
None of the conditions for non-exemption under subsection 23AG(2) of the ITAA 1936 applies to the taxpayer.
Reasons for Decision
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 foreign service will be exempt from tax in Australia.
Subsection 23AG(7) of the ITAA 1936 defines 'foreign earnings': "foreign earnings" means income consisting of earnings, salary, wages, commission, bonuses or allowances but does not include any payment, consideration or amount that: (a) is included in assessable income under Subdivision AA of Division 2; or (b) is excluded from the definition of " eligible termination payment" in subsection 27A(1) because of paragraph (ja), (k), (ka), (m), (ma), (n), or (p) of that definition
The term 'foreign service' is defined in subsection 23AG(7) of the ITAA 1936 to mean service in a foreign country as the holder of an office or in the capacity of an employee.
Subsection 23AG(6) of the ITAA 1936 provides an extended meaning for the term 'engaged in foreign service' under subsection 23AG(1) of the ITAA 1936 to include any period during which the person is in accordance with the terms and conditions of their service absent from work because of accident or illness.
The period during which the taxpayer was in Australia under a return to work program comes within the extended meaning of the term 'engaged in foreign service' under subsection 23AG(6) of the ITAA 1936 as it was in accordance with the terms and conditions of the taxpayer's service.
The case law on workers' compensation payments suggests that payments are assessable income as they are directly related to the amount of earnings which the employee would have been entitled to receive if the employee had been earning it in the form of wages. Where the payments are made under the relevant compensation legislation, the payments are not discretionary payments as the employer is under a statutory liability to make such payments ( Case X21 , 90 ATC 239; AAT Case 5617 (1990) 21 ATR 3157 and Federal Commissioner of Taxation v. Inkster (1989) 24 FCR 53; 89 ATC 5142; (1989) 20 ATR 1516).
The legal interpretation of the word 'earnings' varies depending on the context in which it was used. The word 'earnings' was considered by the Federal Court in Lopez v. Federal Commissioner of Taxation (2005) 143 FCR 574; 2005 ATC 4703; (2005) 60 ATR 387 and in Lopez v. Federal Commissioner of Taxation (2004) FCA 756; 2004 ATC 4704; (2004) 56 ATR 108 in the context of section 23AG of the ITAA 1936. The phrase 'income consisting of earnings' in subsection 23AG(7) of the ITAA 1936: • has a wider connotation than salary or wages. • is sufficient to allow it to comprehend remuneration received from persons other than the employer provided that it is sufficiently incidental to the employment to permit it to be characterised as having been received in the capacity of an employee. • would not be confined to wages and salary paid to an employee, and would include earnings by way of fees or other payments derived by a person engaged under a contract for services as a consultant or independent contractor. However, it is restricted by the definition of the term 'foreign service' under subsection 23AG(7) of the ITAA 1936.
The compensation payments received by the taxpayer are sufficiently incidental to the employment to permit it to be characterised as having been received in the capacity of an employee. The employer was under a statutory obligation to provide these benefits under the terms of the employment contract and under the relevant compensation legislation.
Accordingly, the workers' compensation payments come within the meaning of the phrase 'income consisting of earnings' in subsection 23AG(7) of the ITAA 1936 having regard to the context in which it appears in its widest sense as the income is sufficiently incidental to the employment to permit it to be characterised as having been received in the capacity of an employee.
As the workers' compensation payments are 'foreign earnings' under subsection 23AG(7) of the ITAA 1936 and the taxpayer has satisfied all other requirements of section 23AG of the ITAA 1936, the compensation payments received by the taxpayer deployed overseas, in substitution for salary and allowances, is exempt from tax under subsection 23AG(1) of the ITAA 1936 where the taxpayer is on a graduated return to work program in Australia. The definition of 'foreign earnings' under subsection 23AG(7) of the ITAA 1936 was amended with effect from 1 July 2007. The ATO ID should be followed having regard to that amended definition.
The taxpayer must satisfy all other requirements of section 23AG of the ITAA 1936 before income earned in overseas employment will be exempt from tax in Australia. Note: New subsection 23AG(1AA) of the ITAA 1936, which applies to foreign earnings derived on or after 1 July 2009 from foreign service performed on or after 1 July 2009, now restricts the exemption to certain aid workers, charitable workers and government employees engaged in specific employment activities. The ATO ID should be followed having regard to that additional constraint.