Private ruling: Residency and foreign income
Date of advice: 9 March 2017
Published: August 2017
Ruling period: Year ended 30 June 20XX | Year ended 30 June 20YY | Year ended 30 June 20ZZ
Date scheme commenced: 1 July 20WW

Ruling: Q2: Is the income you earned from your employment in Country X assessable in Australia? Yes.

Relevant facts and circumstances: Prior to your departure from Australia you stored your household effects at your parent's home where you had been living. You informed the Australian Electoral Commission you were departing Australia. You advised your private health insurance provider to have your policy suspended. You did not inform Medicare that you were departing Australia. You departed Australia in mid-20WW. You travelled before beginning your employment with Company A. When you left Australia your intention was to gain sponsorship with your employer to extend your stay in Country X past the 2 year working visa expiry period. You began employment with Company A on a Tier 5 working holiday visa in late 20WW. You occupied a rental dwelling during your time in Country X. You held Country X bank accounts and purchased some home furnishings while overseas. You lodged income tax returns in Country X as a resident of Country X for taxation purposes. You failed to gain sponsorship to allow you to stay in Country X in early 20YY. You maintained employment with Company A until mid 20YY. Your working holiday visa expired in 20YY. You left Country X in mid 20YY to return to Australia permanently. You maintained Australian assets of bank accounts and share holdings. You received income from Australian sources in dividends from share holdings. All of your family members live in Australia. You are not an eligible employee in the Commonwealth Service Superannuation scheme or a member of the Public Sector Superannuation scheme.

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

Reasons for decision: Detailed Reasoning - Residency: 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 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 - 1. The resides test: 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 ). You lived and worked overseas where you lived in rental accommodation and remained overseas for your employment with Company A, you are not considered to be residing in Australia under this test from when you commenced employment in country X until your return to Australia. | Detailed Reasoning - 2. 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. | Detailed Reasoning - Domicile: Domicile is a legal concept, determined according to the Domicile Act 1982 and common law rules established by private international law cases. 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 in another country, the person must be able to prove an intention to make his or her home indefinitely in that country. In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able to prove an intention to make his or her home indefinitely in that country. In your case there is no evidence to show that you took any steps to establish a new domicile in Country X and you have maintained your Australian domicile. 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 courts have considered a person's 'place of abode' is where they consider 'home'. In R v Hammond (1982) ER 1477, Lord Campbell CJ stated that “a man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression.” A place of abode must exhibit the attributes of a place of residence or a place to live, as contrasted with the overnight, weekly or monthly accommodation of a traveller. 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). Clearly, the longer an individual stays in any one particular place, the more permanent in nature is likely to be the stay in that place of abode. An individual's intention regarding the duration of the overseas stay and the length of the actual stay are significant factors in deciding whether they have set up a permanent place of abode. 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. It is the Commissioner's view that an overseas stay in excess of two years may indicate that an individual can be considered to have a permanent place of abode overseas, subject to a consideration of all the other relevant circumstances applying to the taxpayer (paragraphs 25 and 27 of IT 2650). In your case: ● you had a working holiday visa set with an expiry of mid 20YY as they have a nature of 2 year maximum validity ● you occupied a rental dwelling during your time in Country X ● prior to your departure from Australia you stored your household effects at your parent's home ● you maintained Australian assets of bank accounts and share holdings ● you received income from Australian sources in dividends from share holdings Based on these facts, it is considered that you have not established a permanent place of abode in Country X. You are an Australian resident for taxation purposes under the domicile test for the years ending 30 June 20XX, 30 June 20YY and 30 June 20ZZ. | Detailed Reasoning - Your residency status: As you meet the domicile test for the period of your absence, you are a resident of Australia for tax purposes. As you are a resident of Australia, according to section 6-5 of the ITAA 1997, your assessable income includes income gained from all sources, whether in or out of Australia. | Detailed Reasoning - Foreign employment income in Country X: In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). 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 X Agreement is listed in section 5 of the Agreements Act. The Country X agreement is located on the Austlii website (http://www.austlii.edu.au/) in the Australian Treaties Series database. The Country X agreement operates to avoid the double taxation of income received by residents of Australia and Country X. Article 14 of the Country X agreement advises salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country X. If the employment is exercised in Country X, remuneration from such employment may also be taxed in Country X. Remuneration derived by an Australian resident from employment in Country X shall only be taxable in Australia if: (a) the individual is present in Country X for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the year of income or year assessment of Country X, and (b) the income is paid by, or on behalf of, an employer who is not a resident of Country X, and (c) the remuneration is not deductible in determining taxable profits of a permanent establishment which the employer has in Country X. In your case, you fail (a) as you were present in Country X for more than 183 days in any 12 month period commencing or ending in the year of income or year of assessment of Country X. Your employer is based in Country X. Accordingly you do not satisfy (b) for the periods ending 30 June 20XX, 30 June 20YY and 30 June 20ZZ. Your remuneration derived from employment in Country X for the years ending 30 June 20XX, 30 June 20YY and 30 June 20ZZ is assessable income in Australia and may be taxable in Country X. | Detailed Reasoning - Foreign Income Tax Offset (FITO): If you have assessable income from overseas, you must declare it in your Australian income tax return. If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation. These rules apply for income years that start on or after 1 July 2008. You can claim a tax offset for the foreign tax you have paid on income, profits or gains (including gains of a capital nature) that are included in your Australian assessable income. In some circumstances, the offset is subject to a limit. To be entitled to a foreign income tax offset: ● you must have actually paid, or be deemed to have paid, an amount of foreign income tax ● the income or gain on which you paid foreign income tax must be included in your assessable income (or your non-assessable non-exempt (NANE) income under section 21AI or 23AK of the ITAA 1936) for Australian income tax purposes. Differences between the Australian and foreign tax systems may lead to your paying foreign income tax in a different income year from that in which the income or gain is included in your income for Australian income tax purposes. You might have paid the foreign tax in an earlier or later income year. However, the offset can only be claimed after the foreign tax is paid. If you paid foreign income tax after the year in which the related income or gains have been included in your Australian tax return, you can claim the offset by requesting an amended assessment for that year. You have up to four years to request an amendment to your assessment from the date you paid the foreign income tax. You should also request an amendment if there is an increase or reduction in the amount of foreign income tax you paid that counts towards the offset. You claim the foreign income tax offset in your income tax return. A FITO is a non-refundable tax offset, and will 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. A guide to calculating and claiming your foreign income tax offset can be found at https://www.ato.gov.au/Individuals/Tax-return/2016/In-detail/Publications/Guide-to-foreign-income-tax-offset-rules-

Question 1: Are you a resident of Australia for tax purposes?