Lump sum payments received by a foreign resident as arrears of past periodic payments and the Pension Article of the Italian Convention

Does Article 18, the Pensions and Annuities Article (the Pension Article) of the tax convention between Australia and the Republic of Italy (the Italian Convention), apply to lump sum payments received by a resident of Italy as arrears of past periodic payments under section 44 or section 45 of the Transport Accident Act 1986 (Vic ) (TAA 1986)?

Yes. The Pension Article of the Italian Convention applies to lump sum payments received by a resident of Italy as arrears of past periodic payments under section 44 or section 45 of the TAA 1986.

The taxpayer is a foreign resident for Australian tax purposes and a resident of Italy for the purposes of the Italian Convention.

The taxpayer received a lump sum payment from Australia.

The lump sum payment represents arrears of periodic loss of earnings payments from Australia as a result of injury suffered in a transport accident in the State of Victoria.

The lump sum payment 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, which should have been paid periodically over a period of time.

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident includes ordinary income derived directly or indirectly from Australian sources.

The loss of earnings payments are ordinary income for the purpose of subsection 6-5(3) of the ITAA 1997.

In determining liability to Australian tax in respect of Australian sourced income received by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Schedule 21 of the Agreements Act contains the Italian Convention. The Italian Convention operates to avoid double taxation of income received by residents of Australia and residents of Italy.

Article 18(1) of the Italian Convention provides that pensions (including government pensions) and annuities paid to a resident of one of the Contracting States shall be taxable only in that State. Therefore, pensions paid from Australia to a resident of Italy shall be taxable only in Italy.

Article 3(3) of the Italian Convention provides that any term not defined in the Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which this Convention applies. The term 'pension' is not defined in the Italian 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 , 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 ( Tubemakers ). 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.

In the present case, an amount made to the taxpayer as a lump sum representing arrears of unpaid periodic loss of earnings payments by the TAC under section 44 or section 45 of the TAA 1986 is also a 'pension' for the purposes of the Pension Article of the Italian Convention. This is because the lump sum amount represents the aggregate of past loss of earnings payments that should have been made on a periodic basis over a particular period of time.

Therefore, the Pension Article applies to give Italy, as the country of residence of the taxpayer, sole taxing rights over the compensation payment. 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.