Private ruling: Residency and assessability of income
Published: December 2014
Ruling period: Year ended 30 June 2014
Date scheme commenced: 1 July 2013

Ruling: Questions and answers | 1. Were you a resident of Australia for taxation purposes until you left Australia indefinitely? | Yes. | 2. Did you cease to be a resident of Australia for taxation purposes after you left Australia indefinitely? | Yes. | 3. Under the double tax agreement between Australia and country X, are you solely a resident of Australia for the relevant period? | Yes. | 4. Are you assessable in Australia on your Australian source and foreign source income until you left Australia indefinitely? | Yes. | 5. Under the double tax agreement between Australia and country X, are you entitled to claim an Australian foreign income tax offset for country X tax paid on your business income and Australian share dividend income for the relevant period? | No. | 6. Under the double tax agreement between Australia and country X, are you entitled to claim an Australian foreign income tax offset for country X tax paid on your country X rental income and country X interest income? | Yes. | 7. Under the double tax agreement between Australia and country X, is the Australian foreign income tax offset you are entitled to claim in regard to your country X interest income limited to a maximum of 10% of the country X tax paid? | Yes.

Relevant facts and circumstances: You were born in country X and are a citizen of country X. You became an Australian citizen some years ago. For the last several years you have ordinarily resided in your home in Australia. You are self-employed and earn your income from writing, editing and from related consulting work. You travel regularly for business and pleasure. You usually travel to country X several times each year to visit your parent and for work. In the relevant Australian financial year you earned income from the following sources: • your business, which you operate as a sole trader, • dividends from Australian shares, • rental income form a country X investment property, and • bank interest from a country X bank. You and your spouse left Australia indefinitely to live and work in country Y. You have a residency visa that allows you to reside in country Y for three years. You do not intend to return to live in Australia and in the future you will most likely return to country X to live. You were a country X resident for tax purposes in the relevant country X tax year because you spent more days in country X in that period than you did elsewhere. You will not be a country X resident for tax purposes in the next country X tax year. During the country X tax year you spent Y days in country X, Y-3 days in Australia and travelled for the remainder of the days much less than Y in that period. The main reason you spent so many days in country X during this period was to look after a relative following a medical procedure. In the relevant Australian financial year you estimate that you spent Z days in country X, Z-50 days in Australia (up until you left Australia) with the remaining days being spent in other overseas locations. The time you spent outside of Australia during the year was a mix of business and pleasure. During the relevant part year period, you spent separate periods of time in country X of <5 days, <10 days, and two periods of between 50 and 80 days respectively. You state that the purpose of the two longer stays in country X was mainly for pleasure, caring for your relative, but partly business which comprised of normal day to day work and occasionally meeting with clients. You pay tax in country X each year and submit your country X tax return to your Australian accountant with details of the tax you have paid in country X. You are aware that you are entitled to a foreign income tax offset for income tax paid in country X on income that is also included in your assessable income in Australia. Prior to leaving Australia, you did not have any formal business premises that you operated from. Prior to moving to country Y, you operated your business primarily from your home in Australia, but during the country X tax year you also operated the business from your relative's home in country X when you stayed with them for an extended period. Since moving to country Y, you have operated your business from that country. During the relevant Australian financial year, the majority of income from your business came from an Australian based entity of an international corporation with worldwide interests. You were paid from within Australia for the work you did for this entity. In the relevant financial year your Australian home was permanently available for you to live in until you left Australia. The property was listed through a real estate agent and rented out. You now consider this to be an investment property. You have not had what you would call a permanent home in country X for many years, although you can stay at your relative's house in country X whenever you like. You have never lived in the rental property you have in country X. This is purely an investment property and is always rented out. Neither you nor your spouse is employed by the Australian Commonwealth government.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Section 6-5 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Section 5

Reasons for decision: Detailed Reasoning - Residency under Australian tax law: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source. The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (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' and 'permanent place of abode' test; • the 183 day test; and • the superannuation test. 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 meet 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 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'. In deciding cases of residency, the courts and tribunals have noted that a person does not necessarily cease to be a resident because he or she is physically absent from Australia. Instead, the test is whether the person has retained a continuity of association with a place in Australia, together with an intention to return to that place and an attitude that the place remains home (Joachim v Federal Commissioner of Taxation 2002 ATC 2088 ). In your case, you were residing in your Australian home for several years prior to you and your spouse leaving Australia to live and work in country Y. You do not intend to return to live in Australia and may return to country X to live in the future. Based on the information provided, you ceased to reside in Australia and were not a resident under this test from when you left Australia. | Detailed Reasoning - The domicile and permanent place of abode test: Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia. | Detailed Reasoning - Domicile: A person's domicile is generally their country of birth. This is known as a person's domicile of origin. A person may acquire a domicile of choice in another country if they have the intention of making their home indefinitely in that country. The intention needs to be demonstrated in a legal sense, for example, by way of obtaining a migration visa, becoming a permanent resident or becoming a citizen of the country concerned. In your case, your domicile of origin was country X and you moved to Australia and became an Australian citizen. Therefore, you changed your domicile to Australia. Although you have relocated to country Y, there is no evidence to suggest that you have taken any legal steps to change your domicile to that country. Therefore, your domicile is still Australia. | Detailed Reasoning - Permanent place of abode: It is clear from the case law that a person's 'permanent place of abode' cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case. The Commissioner's view on what constitutes a permanent place of abode is contained in Taxation Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650). Generally, where a taxpayer leaves Australia for an unspecified or a substantial period and establishes a home in another country, that home may represent a permanent place of abode of the taxpayer outside Australia. However, a taxpayer who leaves Australia with an intention of returning to Australia at the end of a 'transitory' stay overseas would remain a resident of Australia for income tax purposes. In your case, you were residing in your Australian home for several years prior to you and your spouse leaving Australia to live and work in country Y. You do not intend to return to Australia to live. Based on the information provided, the Commissioner is satisfied that you had a permanent place of abode overseas and were not a resident under this test from when you left Australia. | Detailed Reasoning - The 183 day test: Under the 183 day test, a person is a resident of Australia if they are physically present in Australia for more than 183 days in an income year unless the Commissioner is satisfied that their usual place of abode is outside of Australia and they have no intention of taking up residence here. As you were not physically present in Australia for more than 183 days in the relevant year you are not a resident of Australia under this test. | Detailed Reasoning - The superannuation test: A person will be considered to be a resident under this test if they are currently eligible to contribute to certain superannuation funds for Australian Commonwealth government employees. You will not be treated as a resident under this test as neither you, nor your spouse, are Australian Commonwealth government employees who are eligible to contribute to the relevant Commonwealth government superannuation schemes. | Summary: You were a resident of Australia from until you left Australia in mid 20XX. Therefore, your assessable income includes income gained from all sources, whether in or out of Australia up until mid 20XX. As you were a non-resident from mid 20XX, your assessable income from that time onwards only includes income gained from sources in Australia. | Detailed Reasoning - Residency under double tax agreement: In determining liability to Australian tax on foreign sourced income received by a resident it is necessary to consider not only the income tax laws but also any double tax agreement 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 and ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except for some limited provisions). The double tax agreement with country X (the country X agreement) is listed in section 5 of the Agreements Act. The country X agreement operates to avoid the double taxation of income received by residents of Australia and country X by allocating taxing rights and entitlement to credits for foreign tax paid between the two countries. In your case, you were a tax resident of both Australia and country X for the relevant period. Consequently, it is necessary to refer to the 'tiebreaker' rules contained in the country X agreement to determine whether you will be treated solely as an Australian resident or a country X resident. The country X agreement states that where an individual is both a country X resident and an Australian resident, that individual will be deemed to be a resident only of the country in which a 'permanent home' is available to that individual; however, if a permanent home is available in both countries, or in neither of them, that individual will be deemed to be a resident only of the country with which the individual's personal and economic relations are closer. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that the OECD Model Tax Convention and Commentary (OECD Commentary) provides appropriate guidance when interpreting the terms used in double tax agreements. In relation to a 'permanent home', the OECD Commentary states that: ….this home must be permanent, that is to say, the individual must have arranged and retained it for his 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. As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously…. In your case, you had a permanent home by way of your Australian residence available for you to use at all times. However, in country X you stayed at your relative's residence and did not have any type of owned or rented accommodation available to you. Based on the above, you had a permanent home available to you in Australia and did not have one in country X. Therefore, you were a resident of Australia under the country X agreement for the relevant period. As a resident of Australia under the country X agreement, you will be assessable in Australia on all of your business income, dividend income, rental income and interest income. However, as the taxation treatment of different classes of income can vary under double tax agreements, country X may also have the right to tax some of your income. If this is the case, you may be entitled to claim a foreign income tax offset in your Australian income tax return for country X tax paid. However, the country X agreement imposes restrictions on what you may be entitled to. | Detailed Reasoning - Australian foreign income tax offset: The country X agreement states that tax paid under the laws of country X and in accordance with the agreement in respect of income or gains derived by a person who is a resident of Australia, from sources in country X, shall be allowed as a credit against Australian tax payable in respect of that income Therefore, where country X has the right to tax your income under the agreement, you will be entitled to an Australian foreign income tax offset. However, where country X has taxed your income and does not have the right to do so, you will not be entitled to a foreign income tax offset. Instead, you will have to contact the country X tax authorities with a view to amending your country X tax return to have an appropriate share of your income removed and the tax you paid refunded. | Detailed Reasoning - Assessability of business income: The country X agreement defines the term 'business' to include the performance of professional services and other activities of an independent character. The country X agreement states that the business profits of an enterprise of one of the countries will be taxable only in that country unless the enterprise carries on business in the other country through a 'permanent establishment' situated in that country. If the enterprise carries on business in the other country, the profits of the enterprise may be taxed in the other country, but only so much of them as is attributable to that permanent establishment. In your case, you were a resident of Australia under the country X agreement and running a business as a sole trader in Australia. Therefore, under the country X agreement, all your business profits for that period will only be taxable in Australia unless it is considered that you were carrying on business through a permanent establishment in country X for part of that period. The country X agreement defines a 'permanent establishment' as being a fixed place of business in which the business of the enterprise is wholly or partly carried on. The article also states that a permanent establishment may include a place of management, a branch or an office. Item 2 of the OECD commentary relating to permanent establishment explains that the definition of 'permanent establishment' gives rise to the following conditions: • the existence of a 'place of business', that is, a facility such as premises or, in certain instances, machinery or equipment; • this place of business must be 'fixed', that is, it must be established at a distinct place with a certain degree of permanence; • the carrying on of the business of the enterprise through this fixed place of business. This means usually that the people who, in one way or another, are dependent on the enterprise conduct the business of the enterprise in the country in which the fixed place is situated. Item 4 states that the term 'place of business' covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. Item 5 states that the place of business has to be a 'fixed' one; thus in the normal way there has to be a link between the place of business and a specific geographical point. Item 6 states that since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, that is, if it is not of a purely temporary nature. A place of business may, however, constitute a permanent establishment even though it exists, in practice, only for a very short period of time because the nature of the business is such that it will only be carried on for that short period of time. Although this can be difficult to determine, it can be said that permanent establishments normally have not been considered to exist in situations where a business has been carried on in a country through a place of business that was maintained for less than six months. In your case, the time you spent in country X included two separate periods of between 60 and 80 days duration in which you cared for your relative and partly carried out business activities such as day to day work and occasionally meeting clients. You were staying with your relative and it can be said that you had a place set aside to carry out your business activities in that residence. However, each of the periods of time you spent in country X is significantly less than the six month 'rule of thumb' and even the total is shorter than the usually expected period. Further, you were only partly carrying on business activities during these visits. Consequently, it is considered that you were not carrying on a business through a permanent establishment in country X during the relevant period. Therefore, under the country X agreement, Australia has the sole right to tax your business profits. As country X does not have the right to tax this income, you will not be entitled to an Australian foreign income tax offset for country X tax paid on this income as per the agreement. You should contact the country X authorities with a view to amending your country X tax return to have an appropriate share of your business income removed and your tax refunded. | Detailed Reasoning - Assessability of dividend income from Australian shares: The country X agreement states that dividends paid by a company which is a resident of a country for the purposes of its tax, being dividends beneficially owned by a resident of the other country, may be taxed in that other country. This means that dividends paid by an Australian resident company to an individual can only be taxed in country X if they are paid to a resident of country X. In your case, you receive dividends from Australian shares and are a resident of Australia under the agreement. Therefore, under the country X agreement, country X does not have a right to tax your dividend income and Australia has the sole right to tax the income as you are an Australian resident under the agreement. As country X does not have the right to tax this income, you will not be entitled to an Australian foreign income tax offset for country X tax paid on this income. You should contact the country X authorities with a view to amending your country X tax return to have an appropriate share of your dividend income removed and your tax refunded. Assessability of country X rental income The country X agreement states that income derived by a resident of a country from real property may be taxed in the country in which the real property is situated. This article gives country X the right to tax rental income derived from real property such as land or buildings situated in country X. However, there is nothing in the article that prevents Australia from taxing this income. Therefore, Australia also has the right to tax this income as you are a resident of Australia under the country X agreement. You are entitled to an Australian foreign income tax offset for country X tax paid on this income. | Detailed Reasoning - Assessability of country X interest income: The country X agreement states that interest arising in a country and beneficially owned by a resident of the other country may be taxed in that other country. The article states further that interest may also be taxed in the country in which it arises, and according to the law of that country, but the tax charged shall not exceed 10% of the gross amount of the interest. This means that interest arising in country X that is paid to a resident of Australia can be taxed in Australia. Country X can still tax the interest; however, the rate of tax cannot exceed 10% of the interest amount under the country X agreement. In your case, you should contact the country X tax authorities with a view to amending your country X tax return to have the rate of tax on an appropriate share of your interest income reduced to 10%, should you have been taxed at a higher rate. You are entitled to an Australian foreign income tax offset to a maximum of 10% of the amount of country X tax paid on this income.