Private ruling: Residency and salary and wages
Published: June 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011
Date scheme commenced: 1 July 2009

Ruling: Questions and answers: | Are you a resident of Australia for income tax purposes? | Yes. | Is your foreign sourced income assessable in Australia? | Yes.


Relevant legislative provisions: Subsection 6(1) of the Income Tax Assessment Act 1936 | Subsection 6-5(2) of the Income Tax Assessment Act 1997 | Subsection 6-5(3) of the Income Tax Assessment Act 1997 | Section 770-10 of the Income Tax Assessment Act 1997 | Section 770-130 of the Income Tax Assessment Act 1997 | Section 4 of the International Tax Agreements Act 1953 | Schedule 1 of the International Tax Agreements Act 1953 | Schedule 1, Article 3(3) of the International Tax Agreements Act 1953 | Schedule 1, Article 4(3) of the International Tax Agreements Act 1953 | Schedule 1, Article 14 of the International Tax Agreements Act 1953 | Schedule 1, Article 22(1)(a) of the International Tax Agreements Act 1953

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. The assessable income for a foreign resident includes only income that is derived directly or indirectly from Australian sources, under subsection 6-5(3) of the ITAA 1997. Salary and wages are ordinary income for the purposes of both subsections 6-5(2) and 6-5(3) of the ITAA 1997. Therefore to determine whether the income that you derived from country X is assessable in Australia and therefore is required to be included in your Australian income tax return, it must first be determined whether you were a resident of Australia for income tax purposes for the period that you lived and worked in country X. | Detailed Reasoning - Residency status: An Australian resident for tax purposes is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to be a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936). The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are: · the resides test · the domicile test · the 183 day test · the superannuation test. The first two tests are examined in detail in Taxation Ruling IT 2650: Residency - Permanent Place Of Abode Outside Australia . The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. However, where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests. | Detailed Reasoning - The resides test: The ordinary meaning of the word 'reside', according to the Macquarie Dictionary , 2001, rev. 3 rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Shorter Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'. Taxation Ruling IT 2650 , provides guidelines for determining whether individuals who leave Australia temporarily to live overseas, for example, on temporary overseas work assignments or on overseas study leave, cease to be Australian residents for income tax purposes during their overseas stay. The principles and guidelines adopted in IT 2650 can also be used for individuals who intend to reside overseas indefinitely. Paragraph 19 of IT 2650 states: The first question to be asked in considering the residency status of a person temporarily leaving Australia is whether he or she can be considered to reside in Australia. If the test of residence according to ordinary concepts is satisfied, there is no need to go any further. The person is a resident of Australia for income tax purposes. In your case, you left Australia to live and work. You arrived in country X uncertain of whether you would remain permanently, however you returned to Australia after an extended period. Since you had lived and worked in country X for an extended period, you are considered to have been residing in country X for this period. Accordingly, you are not considered to be residing in Australia and therefore are not a resident for taxation purposes under the 'resides test'. | Detailed Reasoning - The domicile test: If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia. A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. In order to show that an individual's domicile of choice has been adopted, the person must be able prove an intention to make his or her home indefinitely in that country. From the information that you have provided, you have did not demonstrate an intention to become a citizen of the foreign country and were still a citizen of Australia. Therefore it is considered your Australian domicile remained unchanged. The expression 'place of abode' refers to a person's residence, where they live with their family and sleep at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives. A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere. Some of the factors which have been considered relevant by the Courts, Boards of Review and Administrative Appeals Tribunal and which are used by the ATO in reaching a state of satisfaction as to a taxpayer's permanent place of abode include: · the intended and actual length of the taxpayer's stay in the overseas country; · whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time; · whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia; · whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence; · the duration and continuity of the taxpayer's presence in the overseas country; and · the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on. In your case you: · left Australia to live and work in country X; · arrived in country X uncertain of whether you would remain permanently; · returned to Australia after an extended period; · worked on a contract that was renewable at the end of each year while in country X; · had a work contract in country X that could have been renewed indefinitely dependant on your visa status; · lived with friends in a number of different rental accommodations while in country X; · do not own a residence in Australia, and stayed with friends and relatives prior to your departure from Australia; · have an Australian bank account; and · have social ties in Australia that include family, friends and dance colleagues. On the balance and based on the above, as your stay in country X was for a relatively short period and you lived in a number of flats and units during this period, the Commissioner is not satisfied that you established a permanent place of abode outside of Australia. Therefore you are a resident of Australia for income tax purposes under the 'domicile test'. Accordingly, you are considered to a resident of Australia for income tax purposes. | Detailed Reasoning - Your residency status: As you are a resident of Australia under the 'domicile' test outlined in subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997, you are an Australian resident for income tax purposes for the period that you lived in country X. Therefore as a resident of Australia for income tax purposes, under section 6-5(2) of the ITAA 1997 you will be assessed on your worldwide income. However in determining liability to Australian tax on foreign sourced income 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). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one. | Detailed Reasoning - The country X Convention: Schedule 1 to the Agreements Act contains the tax treaty between Australia and country X. The country X Convention operates to avoid the double taxation of income received by Australian and country X residents. In your case, as you are also a resident of country X for income tax purposes, it is necessary to consider the tiebreaker rules for residency in the country X Convention. Article 4(3) of the country X Convention sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the country X Convention. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. Article 4(3) of the country X Convention provides that if an individual is a resident of both Australia and country X, they shall be deemed to be a resident of the State: · in which they maintain a permanent home or if they maintain a permanent home in both States, or neither of them, with which their personal and economic relations are closer, or · if the provisions of (a) do not apply, in which State that individual is a national The terms 'permanent home' and 'personal and economic relations' are undefined in the country X Convention. Article 3(3) of the 2003 foreign country Convention provides that any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law relating to taxes of the country applying the 2003 foreign country Convention. Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting tax treaties. Paragraph 104 of TR 2001/13 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting tax treaties. | Detailed Reasoning - The OECD Commentary provides that in relation to a 'permanent home':: · for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) · any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room. In relation to a taxpayer's personal and economic relations, the OECD Commentary provides that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business. | Detailed Reasoning - Your circumstances: From the information provided you did not have a permanent home in country X, as you did not retain any of the accommodations you stayed in while you lived and worked in country X for your permanent use. The same can be said with regards to you having a permanent home in Australia. In terms of personal and economic ties, you do not own a home or any substantial assets in either Australia or country X and you have friends, work colleagues and dance theatre groups in both countries. However, as your family continued to reside in Australia during the period that you were in the country X, it is considered that you had stronger family ties to Australia. In addition, during the period that you lived in country X you remained an Australian citizen. Accordingly, for the purposes of applying the country X Convention, you are solely a resident of Australia. | Detailed Reasoning - Salary and wages derived in the foreign country: Article 14(1) of the country X provides that salary, wages and other remuneration derived by an individual who is a resident of Australia in respect of an employment shall be subject to tax only in Australia unless the employment is exercised in country X. If the employment is so exercised, such remuneration as is derived from that exercise shall be deemed to have source in, and may be taxed in country X. | Detailed Reasoning - Conclusion: You were an Australian resident for taxation purposes while you lived and worked in the foreign country and therefore any income that was derived during this period is assessable in Australia under section 6-5(2) of the ITAA 1997. However as the employment was exercised in country X, it may also be taxed in country X. Therefore, you will be required to lodge an Australian income tax return for 2009-10 and 2010-211 the income years and declare the income that you derived in country X as assessable income under subsection 6-5(2) of the ITAA 1997. Note: Article 14(2) of the country X may exempt your income from being taxable in country X. You should contact authorities in country X about your taxation liabilities in country X. | Detailed Reasoning - Foreign income tax offset (FITO): Article 22(1)(a) of the country X Convention provides that, subject to the provisions of the laws of Australia, a credit against Australian tax payable shall be allowed for country X tax paid (in accordance with the law of Australia) where tax has been paid under country X law and in accordance with the country X Convention. As you have paid country X tax on the same income that is subject to tax in Australia, Australia is required to provide taxation relief under the country X Convention. Division 770 of the ITAA 1997 allows a foreign income tax offset for foreign tax that a taxpayer has paid on income that is included in the taxpayer's assessable income. The general rule under section 770-10 of the ITAA 1997 is that, to qualify for an offset for an income year, the taxpayer must have paid foreign income tax on an amount that is included in its assessable income for that year, though there are exceptions in certain situations, such as where the tax has been deducted at source, or otherwise paid on the taxpayer's behalf (section 770-130 of the ITAA 1997). As country X tax has been imposed on the income that you derived in the country X which is required to be included in your assessable income in Australia, you may be entitled to a foreign income tax offset. In general terms, the offset is based on the total foreign income tax paid, but is limited (or 'capped') to the amount of Australian income tax that would have been payable on the relevant income. If the total foreign income tax paid is not more than $1,000, a taxpayer can simply claim the amount of the foreign income tax as the tax offset. If the amount exceeds $1,000 a taxpayer has two options: | Detailed Reasoning - Claim only $1,000 as the offset,: Calculate the offset limit (or 'cap') and claim up to the amount of that limit. For further information you can log on the ATO website www.ato.gov.au and type 'Foreign income tax offset' in the search engine provided.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet. | Relevant facts: You were born in Australia and are an Australian citizen. | You are over 16 years of age and are single with no dependants. | You left Australia with the view of living and working in country X. | You arrived in country X on an extended visa. | Once you had lived in country X for a period of time you would then decide whether you wished to remain in country X and therefore change your visa status. | While in country X you worked on a contract that was renewable at the end of each year. | The contract could have been renewed indefinitely dependant on your visa status. | You were taxed as resident of country X by the country X government on the income that you derived in country X. | During your stay in country X you lived with friends in a number of different rental flats and units. | The flats and units were generally within the city region, allowing you to travel easily to and from work. | You did not return to Australia at any time during your overseas stay | Prior to leaving Australia you lived in rental accommodation then with relatives and friends immediately before departure. | While in country X you retained an Australian bank account. | The only asset you held in country X is a bank account. | Your social and sporting connections in Australia consist of family, friends and work colleagues and an interest group. | Your social and sporting connections in country X consist of friends, work colleagues and an interest group. | You worked for Commonwealth Government of Australia a number of years prior to your departure and are a member of Public Sector Superannuation Scheme. However you are no longer a Commonwealth Government employee and therefore no longer eligible to contribute to the superannuation fund.