Private ruling: Foreign employment income
Published: May 2012
Ruling period: Year ended 30 June 2010 | Year ended 30 June 2011 | Year ending 30 June 2012
Date scheme commenced: 1 July 2009

Ruling: Q1: Are you a resident of Australia for tax purposes for the period you resided in Country X? | A1: Yes | Q2: Are you entitled to a foreign income tax offset on your Country X foreign employment income? | A2: Yes

Relevant facts and circumstances: You were born overseas but moved to Australia when you were very young. In 20XX you moved to Country X to take up a full time position. You moved to Country X on a working visa. You moved to Country X on a 12 month contract which was then extended for an additional 12 months. Your intention was always to return to Australia. You left Country X early in the recent year. During the two year period, you did not return to Australia. You kept in contact with friends and family via the internet. You rented an apartment during the two years you lived in Country X. You do not have a main residence in Australia. You stay with relatives. During the period you lived in Country X, you maintained a savings account with an Australian bank. You paid two types of tax on your salary in Country X. - Federal government income tax, and another government tax.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Subsection 995-1 | Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1997 Subsection 770-15(1) | International Tax Agreements Act 1953 Section 4

Reasons for decision: Summary: Summary You are an Australian resident for tax purposes for the period you resided in Country X as you meet the domicile and permanent place of abode test. Therefore the salary that you derived from your employment in Country X is also taxed in Australia. You are entitled to a foreign income tax offset for the two types of taxes on your salary in Country X. | Detailed Reasoning - Detailed reasoning: The term 'Australian resident' is defined in subsection 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean 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 for 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 satisfy the conditions of one of the three other tests. Taxation Ruling IT 2650 contains guidelines for determining whether individuals who leave Australia temporarily to live overseas cease to be Australian residents for income tax purposes during their overseas stay. This Ruling discusses the residency tests. | Detailed Reasoning - Residency according to ordinary concepts: The ordinary meaning of the word 'reside', according to the Macquarie Dictionary Rev. 3 rd ed. 2001, is 'to dwell permanently or for a considerable time, have 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'. For the duration of your employment contract in Country X you were not living in Australia, and therefore didn't reside in Australia according to ordinary concepts. | Detailed Reasoning - Domicile and permanent place of abode: Under this test a person whose domicile is in Australia will be a resident of Australia, unless the person's permanent place of abode is outside of Australia. | Detailed Reasoning - Domicile: Domicile is a legal concept. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home. A person retains the domicile of origin until he or she acquires a domicile of choice in another country, or until he or she acquires another domicile by operation of law. In order to show that a new domicile of choice in a country has been adopted, a person must be able to prove an intention to make his or her home indefinitely in that country, for example, having obtained a migration visa. A working visa, even for a substantial period of time such as two years, would not be sufficient evidence of an intention to acquire a new domicile of choice. You were born overseas and moved to Australia when you were very young, so your domicile is Australia. You have not obtained a migration visa for the purpose of making your home indefinitely in Country X. You have a working visa only for Country X, which is not a migration visa. Consequently, you have retained your Australian domicile during your overseas stay. | Detailed Reasoning - Permanent place of abode: Having established that a person has his or her domicile in Australia, the definition of resident requires that the person's permanent place of abode is not outside Australia. The expression 'place of abode' refers to a person's residence where one lives with one's family and sleeps at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives. In its context in the resident definition a permanent place of abode does not have to be everlasting or forever. It should be contrasted with a temporary or transitory place of abode outside Australia. An intention to return to Australia in the foreseeable future to live does not prevent the taxpayer in the meantime setting up a permanent place of abode elsewhere. Taxation Ruling IT 2650 states the following factors are relevant in determining a person's permanent place of abode: · the intended and actual length of the individual's stay in the overseas country · any intention to return to Australia at some definite point in time or to travel to another country · the establishment of a home outside of Australia · the abandonment of any residence or place of abode the individual may have had in Australia · the duration and continuity of the individual's presence in the overseas country, and · the durability that the individual has with a particular place in Australia. These factors, as they relate to the facts of your case, are considered below. 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. A transitory stray would generally be considered as a stay for a duration of less than two years (IT 2650). From the information you have provided, you had a 12 month work contract in Country X and which was then extended for a further 12 months. After this two year period, you returned to Australia. As your known stay in Country X was for 2 years only, your overseas stay is considered to be transitory in nature. Although during your two year stay in Country X you did not leave, you always intended to return to Australia when your employment contract ceased You have continued your association with Australia by maintaining a bank account in Australia and have kept in contact with friends and family via the internet. Whilst you rented an apartment in Country X and therefore established a home outside of Australia, this is not considered to be sufficient to conclude that your permanent place of abode is outside of Australia. You are therefore a resident of Australia under the domicile and permanent place of abode test for the period you were in Country X. As you have met this test, it is not necessary to examine the application of the 183 day or the superannuation tests. | Detailed Reasoning - Foreign employment income: Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes all the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In determining liability to Australian tax on foreign source income, it is necessary to also consider any applicable double tax agreements (DTA) 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 the Income Tax Assessment Act 1997 so that the Acts are read as one. Australia has signed a DTA with Country X (Country X Convention) . An article of the Country X Convention provides that salary and wages income of an Australian resident shall be taxable in Australia unless the employment is exercised in Country X. If the employment is exercised in Country X, then the income may be taxed in Country X. Therefore, your salary is subject to tax in Country X under the Country X Convention. Taxation Ruling TR 2001/13 provides interpretation of Australia's tax treaties in particular paragraphs 22 to 26 provide an interpretation on the words used to allocate taxing rights. Paragraph 23 of TR 2001/13 provides that the phrase 'may be taxed' normally means that the source country has a non-exclusive entitlement to tax the income. Under normal international tax principles, the residence country may also continue to tax its residents (where its normal domestic law so provided) on the income, wherever sourced, unless the tax treaty explicitly prevents it from doing so. Accordingly, the salary derived by you as an Australian resident from employment exercised in Country X is also assessable in Australia under subsection 6-5(2) of the ITAA 1997. | Detailed Reasoning - Entitlement to foreign income tax offset: A tax offset will be available for those foreign income taxes that are substantially equivalent to Australian income tax. That is, the foreign income tax must be levied on the taxpayer's income, profits or gains of an income or capital nature, or be similar to Australian withholding tax that is imposed in place of a tax on the net amount of income (Subsection 770-15(1) of the ITAA 1997) The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997). That is, when claiming a foreign income tax offset of more than $1,000 you need to calculate your foreign income tax offset limit. For information on this, please refer to the Guide to foreign income tax offset rules 2010-11 on the Australian Taxation Office website www.ato.gov.au. You can only claim an offset up to the amount of that cap. Any excess offset cannot be carried forward to a later income year. In your case, you derived salary in Country X. You have also paid two different taxes on that salary. Both of these taxes are listed in Taxation Ruling IT 2507 as foreign taxes eligible for credit against Australian income tax.

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