Issue
Does Article 17, the Pensions and annuities Article (the Pension Article) of the 2003 United Kingdom Convention and Notes (the UK Convention), apply to loss of earnings payments made under section 44 or section 45 of the Transport Accident Act 1986 (Vic) (TAA 1986) or under similar legislation in other Australian States and Territories, to an individual UK resident?
Decision
Yes. The Pension Article of the UK Convention applies to loss of earnings payments made under section 44 or section 45 of the TAA 1986 or under similar legislation in other Australian States and Territories, to the individual UK resident.
Facts
A non-resident individual (the taxpayer) who is a UK resident for the purposes of the UK Convention, received loss of earnings payments from Australia as a result of injury suffered in a transport accident in the State of Victoria.
The payments comprised weekly statutory compensation payments made by the Victorian Transport Accident Commission (TAC) under section 44 or section 45 of the TAA 1986 for loss of income due to the injury.
The payments are calculated by reference to the recipient's pre-accident earnings.
Similar statutory compensation payments are made in other Australian States and Territories under statutory provisions similar to the TAA 1986.
Reasons for Decision
Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from Australian sources.
The loss of earnings payments are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.
In determining liability to Australian tax in respect of Australian sourced income received by a non-resident taxpayer, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreement Act 1953 (the Agreements Act).
Schedule 1 of the Agreements Act contains the UK Convention (the double tax treaty between Australia and the United Kingdom).
Article 17(1) of the UK Convention provides that pensions (including government pensions) and annuities paid to a resident of a Contracting State shall be taxable only in that State. Therefore, pensions paid from Australia to an individual who is a resident of the UK shall be taxable only in the UK.
Article 3(3) of the UK Convention provides that any term not defined in the Convention shall, unless the context requires otherwise, have the meaning it has under the domestic laws in respect of the taxes to which the Convention applies. The term 'pension' is not defined in the UK Convention or in Australia's domestic taxation law.
Taxation Determination TD 93/151 discusses the meaning of a 'pension' for tax treaty purposes in the context of workers compensation payments. Paragraph 1 of TD 93/151 states that a 'pension' is defined in The Macquarie Dictionary , 2001, 3rd edn, The Macquarie Library Pty Ltd, NSW 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 also considered by Hill J. in the Federal Court in Tubemakers of Australia Ltd v. Federal Commissioner of Taxation 93 ATC 4207; (1993) 25 ATR 183 ( Tubermakers ). His Honour concluded that the essential characteristic of a 'pension' is periodic payments.
The loss of earnings payments made under section 44 or section 45 of the TAA 1986 have the essential characteristic of a 'pension' as per Hill J. in Tubemakers and fall within the Macquarie dictionary definition of 'pension' as they are fixed periodic payments made in consideration of injury or loss sustained. Accordingly, the periodic compensation payments made to the taxpayer by the TAC under section 44 or section 45 are a 'pension' for the purposes of the Pension Article of the UK Convention.
Therefore, the Pension Article applies to give the UK, as the country of residence of the taxpayer, sole taxing rights over the compensation payments. Note: the above analysis also applies to the Pension Article of the majority of Australia's tax treaties, particularly those that do not have a specific treaty definition of the term 'pension'. However, the terms of the relevant treaty must be considered in each case.