Private ruling: Dual residency
Date of advice: 25 May 2023
Published: 10 July 2023
Ruling period: Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX | Year ending 30 June 20XX
Date scheme commenced: 1 July 20XX

Ruling: Q1: Is your foreign source pension, housing allowance and taxation allowance assessable income in Australia? | A1: No. | Q2: If so, are you entitled to a foreign tax credit in Australia for the foreign tax paid? | A2: No. | Q3: Are you liable for the Medicare levy if your taxable income or family income in Australia exceeds the relevant Medicare levy threshold amount? | A3: Yes. | Q4: Are you liable for the Medicare levy surcharge if your taxable income or combined family income (including reportable fringe benefits) in Australia is greater than the relevant surcharge threshold amount for the income year? | A4: Yes.

Relevant facts and circumstances: You are a resident of Country A. You and your spouse plan to continue living in Australia for part of each year. You have purchased a house in Australia, which is used solely as your main residence. You maintain a residence in Country A which you intend to keep should you move to Australia and use it for the time which you expect to spend in Country A each year. The house will be kept furnished and ready for use whenever you return to Country A. All of your family ties are with Country A with the exception of one relative who resides in Australia. You have little contact with your relative. You consider that you will have a habitual abode in both Country A and Australia. You have stated that your closest economic and personal ties will remain in Country A even if you have purchased a property in Australia and live in Australia part of each year. You are considered by the tax authorities of Country A to be a resident of Country A. You have been advised by the tax authorities of Country A that you will remain a resident of Country A for taxation purposes notwithstanding how many days in a tax year you would be residing in Australia and as long as you maintain residential property in Country A which is being used and is available exclusively for personal residential purposes. Your income consists of a pension paid following your retirement from a foreign organisation. In addition to the basic pension, you receive a taxation allowance which pays approximately 50% of the taxation on your pension and which is only paid if you are subject to Country A taxation. In addition, you receive a household allowance provided you remain a tax resident of a member state of Country A. You also receive some income from bank accounts maintained in Country A. You currently have a bank account in Australia which is used to simplify access to your funds in Country A. You have health insurance provided by your former employer. This provides worldwide private and full medical cover and old age/disability care insurance. The health fund is not registered in Australia. You are not a prescribed person for Medicare Levy purposes.

Relevant legislative provisions: Income Tax Assessment Act 1936 paragraph 251S(1)(a) | Income Tax Assessment Act 1936 section 251T | Income Tax Assessment Act 1997 subsection 6-5(2) | Income Tax Assessment Act 1997 subsection 6-5(3) | Income Tax Assessment Act 1997 section 770-10 | International Tax Agreements Act 1953 | Medicare Levy Act 1986 section 7 | Medicare Levy Act 1986 section 3A

Reasons for decision: Summary: Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year. | Detailed Reasoning - Residency: As we have not been asked to determine whether you are a resident of Australia for taxation, for the purpose of this ruling, we will assume that you satisfy the relevant residency tests and are considered a resident of Australia. In determining liability to Australian tax, 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 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that the Acts are read as one. 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. The Country A Agreement is listed in section 5 of the Agreements Act. The Country A Agreement is located on the Austlii website ( www.austlii.edu.au ) in the Australian Treaties Series database. The Country A agreement operates to avoid the double taxation of income received by residents of Australia and Country A. In your case you are dual resident of Australia and Country A for income tax purposes. Article X of the Country A Agreement provides rules (the 'tie-breaker' rules) to ensure that a dual resident individual is treated as a resident of only one of the countries for the purposes of working out the liability to tax on their income under the Country A Agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. In relation to a habitual abode, you consider that you will have a habitual abode in both Country A and Australia. According to Article X of the Country A Agreement, where an individual has a permanent home and a habitual abode in both countries, the individual will be considered to be a resident of the country in which his personal and economic relations are closest. In your case, you stated that although you have purchased a property in Australia and live in Australia for part of each year, your closest personal and economic relations will remain in Country A. Accordingly, for the purposes of applying the Country A Agreement, you are solely a resident of Country A. | Detailed Reasoning - Assessability of foreign source income: The taxation allowance and the housing allowance form part of your pension as they are only paid if you are receiving the pension. Article X of the Country A Agreement provides that pensions and annuities paid to residents of Country A are taxable only in Country A. As you are a resident of Country A as determined under Article X of the Country A Agreement, the pension including the allowances is therefore only taxable in Country A. Accordingly, your pension and allowances are not included in your assessable income under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Foreign income tax offset: With effect from 1 July 2008 the foreign tax credit (FTC) system has been replaced by the foreign income tax offset (FITO) system contained in Div 770 of the ITAA 1997. While the FITO rules are broadly similar in operation to the FTC rules, there are some significant differences in detail. A FITO arising under Div 770 of the ITAA 1997 is a non-refundable tax offset. A taxpayer's FITO entitlement arises under section 770-10 of the ITAA 1997 in the year that an amount on which foreign income tax has been paid is included in assessable income. A FITO will effectively reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid. As your pension and allowances are only taxable in Country A and not included in your assessable income in Australia, section 770-10 of the ITAA 1997 will not apply to allow as a foreign income tax offset any foreign tax paid on the income. | Detailed Reasoning - Medicare levy: Paragraph 251S(1)(a) of the ITAA 1936 provides that a Medicare levy is levied upon the taxable income of a person who at any time during the year of income was a resident of Australia (Taxation Ruling IT 2615). The basic rate of Medicare levy is 1.5% of the taxpayer's taxable income. Full or partial exemption from the Medicare levy is provided to a taxpayer who is a prescribed person (section 251T of the ITAA 1936). As you stated that you are not a prescribed person for Medicare levy purposes, you are not entitled to a full or partial exemption from the Medicare levy. Relief from the Medicare levy is provided to certain low income earners under section 7 of the Medicare Levy Act 1986 (MLA 1986). Medicare levy is calculated at 20 cents for each dollar above the relevant threshold amount but not exceeding the phase-in limit. Higher threshold amounts are available to taxpayers eligible for the Senior Australians tax offset (SATO) or the pensioner tax offset. Section 8 of the MLA 1986 provides a higher threshold amount and phase-in limit if the taxpayer is married on the last day of the income year. The amount of levy payable depends on the amount by which the taxpayer's 'family income' exceeds the 'family income threshold'. You are a resident of Australia for income purposes under subsection 6(1) of the ITAA 1936 and not a prescribed person for Medicare levy purposes. Consequently, if your taxable income or family income in Australia exceeds the relevant Medicare levy threshold, you are liable to the Medicare levy. | Detailed Reasoning - Medicare levy surcharge: High-income taxpayers without adequate private patient hospital insurance are liable for an additional 1% Medicare Levy Surcharge. The legislation governing it is contained in the Medicare Levy Act 1986 . The surcharge is levied on the taxpayers entire taxable income for that income year. In accordance with the Medicare Levy Act 1986 , if a taxpayer is married, they will be subject to a Medicare levy surcharge, for the whole or part of a year of income, where: • they or at least one of their dependants (unless the dependant is a prescribed person) is not covered by private patient hospital cover; and • they are not a prescribed person; and • the combined taxable income (including reportable fringe benefits) of the taxpayer and their spouse exceeds the family surcharge threshold. The family surcharge threshold is defined in section 3A of the MLA 1986 as $100,000 where the taxpayer has only one dependant. Private patient hospital cover is cover provided by an insurance policy issued by a registered fund for some or all hospital treatment provided in an Australian hospital or day hospital facility, within the meaning of section 5A of the National Health Act 1953 (Health Act). Only 'registered organizations', as defined in the Health Act, can provide an 'applicable benefits arrangement'. In your case, you are a resident of Australia for Australian income tax purposes. Your health insurance provided by your former employer is not a health fund registered in Australia and you are not a prescribed person. Therefore, if your taxable income or combined family income (including reportable fringe benefits) in Australia is greater than the relevant surcharge threshold, you will be liable for the Medicare levy surcharge.