Private ruling: Residency and assessability of foreign source income
Published: February 2015
Ruling period: 1 July 2014 to 30 June 2019.
Date scheme commenced: 1 July 2014.

Ruling: Questions and answers: | 1. Are you a temporary resident of Australia for tax purposes? | Yes. | 2. Is your foreign income assessable in Australia? | No.

Relevant facts and circumstances: You are a foreign citizen. You and your spouse arrived in Australia from a foreign country. You and your spouse are in Australia under the provisions of temporary visas. You earn income in the form of interest and capital gains from investments in foreign countries.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1). | Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1997 Section 6-10. | Income Tax Assessment Act 1997 Section 6-15. | Income Tax Assessment Act 1997 Section 768-910. | Income Tax Assessment Act 1997 Section 768-915. | Income Tax Assessment Act 1997 Section 855-15. | Income Tax Assessment Act 1997 Subsection 995-1(1).

Reasons for decision: Detailed Reasoning - Assessable income and residency for taxation purposes - general: As a general rule, the assessable income in Australia of an individual who is a resident of Australia for taxation purposes will include all the ordinary and statutory income they earn from all sources, in and out of Australia. Interest income is a form of ordinary income. Capital gains are a form of statutory income. Although an individual may be a resident of Australia for taxation purposes he or she may also be a temporary resident for taxation purposes at the same time. Where this is the case, the temporary resident provisions of Australia's tax law may operate to exclude certain foreign source income of the individual from being assessable in Australia. | Detailed Reasoning - Residency for taxation purposes: Section 995-1 of the Income tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as 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. The tests are: • the resides test, • the domicile test, • the 183 day test, and • the superannuation test. If any one of these tests is met, an individual will be a resident of Australia for taxation purposes. The resides test is the primary test for determining the residency status of an individual for taxation purposes. If residency is established under the resides test, the remaining three tests do not need to be considered. The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside' which is not defined in Australian taxation law. In Dempsey and Commissioner of Taxation [2014] AATA 335 (29 May 2014) the Administrative Appeals Tribunal noted that the settled position of the courts (at ultimate appellant level) as to the meaning of the word resides for the purposes of subsection 6(1) of the ITAA 1936 is that the word: bears its ordinary English meaning, which 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". Based on the facts you have provided, we consider you are residing in Australia according to the ordinary meaning of the word and are therefore a resident of Australia for taxation purposes under this test. As a consequence, the remaining tests of residency do not need to be considered in your case. | Detailed Reasoning - Temporary residency for taxation purposes: An individual who is a resident of Australia for taxation purposes will also be considered a temporary resident for taxation purposes if: • they hold a temporary visa granted under the Migration Act 1958 , and • they are not an Australian resident within the meaning of the Social Security Act 1991, and • they do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. The Social Security Act 1991 defines an Australian resident as a person who resides in Australia and is an Australian citizen, the holder of a permanent visa, or a protected special category visa holder who was in Australia on or before 26 February 2001. Based on the facts you have provided you are a temporary resident of Australia for taxation purposes because: • you hold a temporary visa issued under the Migration Act 1958, and • neither you nor your spouse are Australian residents within the meaning of the Social Security Act 1991 . | Detailed Reasoning - Temporary residents and assessable income: Subdivision 768-R of the ITAA 1997 provides an exemption for most foreign income derived by individuals who are temporary residents of Australia for taxation purposes. This exemption is explained in part by the following extract from Paragraph 1.23 of the Explanatory Memorandum to the Tax Laws Amendment (2006 Measures No. 1) Bill 2006 : This Bill makes ordinary income derived from a foreign source during the period the taxpayer is a temporary resident non-assessable non-exempt income. This measure also applies to all statutory income that has a source other than Australia on which the taxpayer would otherwise be taxed. Income that is non-assessable, non-exempt income is not assessable income under the provisions of subsection 6-15(3) of the ITAA 1997. Section 768-910 of the ITAA 1997 provides that ordinary income (such as interest) and statutory income (with the exception of net capital gains) derived by a temporary resident from sources outside Australia are non-assessable, non-exempt income. Capital gains or losses made by a temporary resident are specifically dealt with by section 768-915 of the ITAA 1997. In simple terms, the effect of section 768-915 of the ITAA 1997 is that temporary residents are subject to the same capital gains tax (CGT) rules as foreign residents. This means that if you are a temporary resident, you can disregard (and therefore exclude from your assessable income in Australia) any gain or loss made from a CGT event that is not taxable Australian property. Taxable Australian property is defined in section 855-15 of the ITAA 1997. Your investments in foreign countries are not included in the definition of taxable Australian property. | Detailed Reasoning - Conclusion: Based on the facts you have provided: • You are both a resident and temporary resident of Australia for taxation purposes. • Because you are a temporary resident for taxation purposes your assessable income in Australia does not include the interest and capital gains you make from your investments in structured notes, derivatives, hedge funds and managed funds in foreign countries.