Private ruling: Residency - foreign source income
Ruling period: Year ended 30 June 2010
Date scheme commenced: 1 July 2009

Ruling: Q1: 1. Are you an Australian resident for taxation purposes? | A5: 

Relevant facts and circumstances: You are a citizen of Australia and your country of origin is also Australia. You moved to country X some time ago. You married a citizen of country X not long after. Your spouse passed away in 200X, but you and your child remained in country X until coming to Australia in a more recent particular year. You moved back to Australia for three years to enable your child to attend school here. You maintain a residence in both country X and in Australia. You purchased your Australian residence prior to moving back to Australia to live in it. You maintain one bank account in Australia in which you transfer expense money to and from your country X accounts. You have no other assets in Australia. You do not work in Australia and derive no income here. You plan to return to country X permanently when your child completes high school, being the end of 2013. You have been back to country X twice since arriving in Australia in the recent particular year. The purpose of the both visits was predominantly to check on investments and arrange for friends and relatives to care for your home in country X. One of your country X's investments is a commercial rental, operating a café which requires regular attention and contact with the tenant. You make the decisions relating to your investments in country X in Australia. You have paid country X tax on your rental, dividend, interest and pension income. You are taxed in country X on your global income and you are considered an ordinary resident for tax purposes in country X due to your asset position, despite temporarily residing in Australia.

Relevant legislative provisions: Subsection 6(1) of the Income Tax Assessment Act 1936 | Subsection 6-5(2) 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 of the International Tax Agreements Act 1953 | Article 4(3) of the International Tax Agreements Act 1953 | Article 6(1) of the International Tax Agreements Act 1953 | Article 22(1)(a) of the International Tax Agreements Act 1953 | Article 10(1) of the International Tax Agreements Act 1953 | Article 17(1) of the International Tax Agreements Act 1953

Reasons for decision: Detailed Reasoning - Residency status under domestic law: The terms resident and resident of Australia are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition provides a series of tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are: 1. the resides test 2. the domicile test 3. the 183 day test 4. the superannuation test. The primary test is whether the taxpayer resides in Australia according to the ordinary meaning of the word resides. If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian tax purposes has been established. | Detailed Reasoning - 1. 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 Compact 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 TR 98/17 considers the residency status of individuals entering Australia and states that the period of physical presence or length of time in Australia is not, by itself, decisive when determining whether an individual resides here. However, an individual's behaviour over the time spent in Australia may reflect a degree of continuity, routine or habit that is consistent with residing here. In your case, you are a citizen of Australia who returned to Australia in 2008. You only left Australia twice since your arrival. You child attend school in Australia. You purchased a property in Australia and maintained it as you main residence during your stay. You intend to remain in Australia until the end of 2013. Based on the information you have provided, your behaviour in Australia reflects a degree of continuity, routine or habit that is consistent with residing here. Accordingly, you are an Australian resident for taxation purposes from the date of your arrival in Australia in 2008. As you are considered to be a resident under the primary test it is not necessary to consider your residency status under the other three tests mentioned. | Detailed Reasoning - Residency status under the country X Convention: 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. Rental and investment income are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. 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 Income Tax Assessment Act 1936 (ITAA 1936) and ITAA 1997 so that those Acts are read as one. A Schedule to the Agreements Act contains the tax treaty between Australia and the country X (the country X Convention). 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 the UK for income tax purposes, you are considered as a dual resident. Consequently, 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: (a) 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 (b) 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 otherwise undefined in the country X Convention. Article 3(3) of the country X 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 country X 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. The OECD Commentary provides that in relation to a 'permanent home': (a) 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) (b) 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. As you maintain residences in both countries which are available at all times continuously for your permanent use, you have a permanent home in Australia and in country X. 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. In your case, you are physically present in Australia for the majority of time, your closest personal tie is your child, who is living with you in Australia and all the decision makings in relation to your investment in country X is made by you in Australia. Your personal and economic ties are closer with Australia than with country X. Accordingly, for the purposes of applying the country X Convention, you are solely a resident of Australia. | Detailed Reasoning - Rental income from country X: Article 6(1) of the country X Convention provides that income from real property may be taxed by the country in which such real property is situated. While Article 6(1) of the country X Convention allocates a non-exclusive taxation right to country X based on the location of the real property (that is, its source), it does not expressly address Australia's taxation rights. Paragraph 23 of Taxation Ruling 2001/13 provides guidance on the interpretation of the phrase 'may be taxed' in an article of a tax treaty: What the phrase 'may be taxed' normally means is that the country mentioned (the source country) has a non-exclusive entitlement to tax the income. Under normal international tax principles, the other (residence) country may also continue to tax its residents (where its domestic law so provides) on the income, wherever sourced, unless the treaty explicitly prevents it from doing so. As you are a resident of Australia who owns real property situated in country X, the rental income derived by you may be taxed in Australia and country X. Consequently the rental income received by you from real property located in country X is assessable under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Dividend income from country X: Article 10(1) of the country X Convention provides that dividends paid by country X's company to a resident of Australia may be taxed in Australia. As you are a resident of Australia, the dividend income derived by you may be taxed in Australia and country X. You must therefore include the amount of the dividend received from the country X Company in your assessable income in Australia under subsection 6-5(2) of the ITAA 1997. As country X tax has been imposed and paid on your income which is included in your assessable income in Australia, you are entitled to a foreign income tax offset. | 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 UK 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 as source, or otherwise paid on the taxpayer's behalf (section 770-130 of the ITAA 1997). As country X tax has been imposed and paid on the rental and dividend income which is included in your assessable income in Australia, you are entitled to a foreign income tax offset. | Detailed Reasoning - Interest income received from country Y: As Australia does not have a tax treaty with country Y, our domestic laws will apply in relation to income derived by Australian residents from this country. Interest income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997. Accordingly, the interest income you derived as an Australian resident from country Y is included in your assessable income in Australia under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Pension income from country X: Article 17(1) of the country X Convention provides that pensions (including government pensions) paid to a resident of the Australia will be taxable only in Australia. As you are a resident of Australia, the pension income derived by you is taxable only in Australia. Accordingly, the pension received by you from country X, while residing in Australia, is assessable income in Australia under subsection 6-5(2) of the ITAA 1997.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns. | 2. Is the rental income you received from country X included in your assessable in Australia? | 3. Is the dividend income you received from country X included in your assessable income in Australia? | 4. Is the interest income you received from country Y included in your assessable income in Australia? | 5. Is the pension you received from country X included in your assessable income in Australia?