Is the insurance payout you received from an Australian insurance company for loss of income assessable in Australia, given that you were a non-resident for Australian tax purposes during the relevant income year?
Yes. This ruling applies for the following period: Year ended DD MM 20XX The scheme commenced on: DD MM 20XX
Employment Background You are a citizen of Country A. On DD MM 20XX, you entered a contract to for the 20XX-XX season. The contract had a term of XX weeks from DD MM 20XX to DD MM 20XX. Under the terms of the contract, you were required: • Terms provided You participated in events which required you to travel to Australia for those events. You travelled from Country A to Australia on X separate occasions during the 20XX-XX income year, as outlined below: • Information provided The above travel was undertaken solely for participation in scheduled employment. You were employed by an Australian-based company, Company A. Injury and Insurance Payments On DD MM 20XX, you sustained a physical injury while employed in Australia. As a result of this injury, you were unable to continue performing your employment duties and experienced a period of reduced work capacity and loss of income. On DD MM 20XX, you lodged an insurance claim and received income replacement payments administered by Company B. Company B acted on behalf of certain underwriters based at Premises A in making these payments.
On DD MM 20XX, Company A paid you $XX in income replacement benefits. Amounts totalling $XX were withheld at source, and you received a net payment of $XX. On DD MM 20XX, Company A paid you a further $XX in income replacement benefits. Amounts totalling $XX were withheld at source, resulting in a net payment of $XX. These payments were not compensation for medical expenses, pain and suffering, or permanent impairment. Instead, they were weekly compensation payments relating to the period during which you were employed in Australia from DD MM 20XX to DD MM 20XX.
Income Tax Assessment Act 1936 subsection 6(1) Income Tax Assessment Act 1997 subsection 6-5(3) International Tax Agreements Act 1953 section 4
These reasons for decision accompany the Notice of private ruling for person A. Summary The insurance payments you received because of your injury are treated as ordinary income for tax purposes because they replace the salary and wages you would have earned. These payments are assessable in Australia as they constitute substituted income. As a non-resident taxpayer, you are required to declare in your tax return any income that is derived, either directly or indirectly, from Australian sources during the relevant income year. The loss-of-income insurance payments you received are therefore included in your assessable income for that year. Detailed reasoning Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a non-resident taxpayer includes income derived directly or indirectly from all Australian sources during the income year. Ordinary income has been held to include income from providing 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 or relied upon
• have an element of periodicity, recurrence or regularity • replace income. Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997. An amount paid to compensate for loss generally acquires the character of that for which it is substituted ( FC of T v. Dixon (1952) 86 CLR 540; (1952) 5 ATR 443; 10 ATD 82). Compensation payments which substitute income have been held by the courts to be income under ordinary concepts ( FC of T v. Inkster (1989) 20 ATR 1516; 89 ATC 5142; Tinkler v. FC of T (1979) 10 ATR 411; 79 ATC 4641; Case Y47 (1991) 22 ATR 3422; 91 ATC 433). In determining whether a non-resident taxpayer is liable to Australian income tax on Australian-sourced income, it is necessary to consider both the domestic income tax legislation and any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).Section 4 of the International Tax Agreements Act 1953
(Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. Country A is listed in section 5 of the Agreements Act. The Convention Between Australia and Country A for the Avoidance of Double Taxation with respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion (Paris, 26 June 2009) [2010] ATS 10 (the Agreement), operates to avoid the double taxation of income received by residents of Australia and Country A. Article 14 of the Agreement states: salaries, wages, and similar remuneration derived by a resident of one Contracting State are taxable only in that State unless the employment is exercised in the other State. Where the employment is exercised in the other State, that State may tax the income.
In summary, Article 14 of the Country A Convention allows income derived by a resident of one country, such as Country A, from performances carried out in the other country, such as Australia, to be taxed in the country where the activity is performed. Article 17(1) of the Agreement provides: that certain income derived by visiting sportspersons may be taxed in the country in which the activities are exercised, irrespective of the sportsperson's residency or duration of visit. Article 17(3) of the Agreement provides: that Article 17 does not apply to income derived by residents of either country as a member of a recognised team playing regularly in a league competition organised and conducted in both Australia and Country A. Where Article 17(3) applies, employment income of the person will instead be taxed under Article 14 (income from employment). Application to your case Based on the information provided, the income you received from your Australian-based employer is treated as Australian-sourced for taxation purposes. The duties relevant to your injury were performed in Australia, and the associated employment activities are therefore taken to have been carried out in Australia.
Under Article 14 of the Agreement, employment income is taxable in the country in which the employment is exercised. As your employment duties were performed in Australia, Australia has the primary taxing right over this income. Article 17(1) of the Agreement applies to visiting sportsperson and provides income derived from employment activities may be taxed in the country in which those activities occur, regardless of the length of the visit. You were present in Australia while participating in employment activities. Article 17(3) of the Agreement does not apply in your circumstances. Your employer participated regularly in a competition conducted across both Australia and internationally. As such, Article 17(3) does not alter the allocation of taxing rights, and Article 14 remains the governing provision. Accordingly. the payments you received under your income protection policy are included in your assessable income under subsection 6-5(3) of the ITAA 1997, as they are ordinary income derived from an Australian source.