Private ruling: Residency and foreign employment income
Published: August 2011
Ruling period: Year ended 30 June 2011
Date scheme commenced: 1 July 2010

Ruling: Q1: Were you a resident of Australia for tax purposes for the year ended 30 June 2011? | A1: Yes. | Q2: Is your foreign employment income exempt from tax in Australia? | A2: No.

Relevant facts and circumstances: You are a citizen of Country A and were born in Country A. In 2005 you commenced working outside of Country A. You first came to Australia on an electronic visitor's visa during the 20XX-XXfinancial year for a month. The visa allowed you to stay in Australia for up to three months per visit. At the time you were working in Country B. Whilst working in Country B, you spent your leave in Australia and Country C. You ceased working in Country B during the 20XX-XXfinancial year, returned to Australia for a month before travelling to Country C for five months. During the 20XX-XXfinancial year you: · returned to Australia · three months later you completed an application for a Partner (Temporary) visa and were granted a bridging visa · after that you were granted a Partner (Temporary) visa. This is a two year visa. When this visa expires you intend to apply for a permanent resident visa. During the 20XX-XXfinancial year you and your partner purchased a house in Australia which you own as tenants in common. You have a joint bank account with your partner and jointly own a car and motor bike. You and your partner have a child. You are a member of the local club. Your parents live in Country A and you store some of your personal effects at their house. You have a bank account and superannuation/pension fund in Country A. You are a member of clubs in Country A but are in the process of finalising these memberships. You pay tax in Country A on your income from all sources but receive a tax deduction as you work abroad. Since arriving in Australia you have spent one month in Country A in the 20XX-XXfinancial year. In the 20XX-XXfinancial year you accepted a contract for employment in Country D. Your employer provides services to an aid agency. You left Australia for Country D during the 20XX-XXfinancial year. You originally held one and three month tourist visas for Country D whilst your six month business visa application was processed. You return to Australia on your leave periods. Your contract has no official end date although you accepted it for a period of one year. You have been offered an extension but have not decided whether you will extend of not. You do not pay tax on your earnings in Country D. Your salary from Country D is declared as income on your tax return for Country A and taxed by their tax authority.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) Income Tax Assessment Act 1936 Subsection 23AG(1) Income Tax Assessment Act 1936 Subsection 23AG(1AA) Income Tax Assessment Act 1936 Subsection 23AG(7) Income Tax Assessment Act 1997 Section 6-5 Income Tax Assessment Act 1997 Section 995-1 International Tax Agreements Act 1953

Reasons for decision: Summary: You were an Australian resident for tax purposes for the year ended 30 June 20XX as you met the definition of a resident for the full year. Your salary and wages from your Country D employment is assessable in Australia. | Detailed Reasoning - Residency: An Australian resident is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to be 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. 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 satisfy the conditions of one of the other three tests. If the taxpayer meets the conditions of the first test, it is not necessary to consider the other three 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'. Taxation Ruling TR 98/17 considers the residency status of individuals entering Australia. Paragraph 16 of TR 98/17 states that a person who migrates to Australia with the intention of becoming a permanent resident is generally considered to be a resident for tax purposes from the date of their arrival. You arrived in Australia on an electronic visitor's visa which allowed you to stay in the country for three months. You applied for a Partner visa as you intended to reside in Australia permanently with your partner and child. A Partner Visa allows you to enter or remain in Australia on the basis of your married or de facto relationship with your partner: · initially on a temporary visa for a waiting period of two years from the date you applied for the visa, then · on a permanent visa if, after the waiting period, your partner relationship still exists and you are still eligible for this visa. You were granted a Partner (Temporary) visa during the 20XX-XXfinancial year. Thus, it is considered that you became a resident for tax purposes when you applied for your residency visa as this is when you declared your intention to become a permanent resident of Australia. It is considered that you were a resident for tax purposes from 1 July 20XX. However, as you left Australia to commence employment in Country D during the 20XX-XXfinancial year we need to examine whether you are considered to be a resident for the period you were in Country D. During your overseas employment in Country D you were not living in Australia, you were living in Country D, and therefore did not reside in Australia according to ordinary concepts. | Detailed Reasoning - Domicile and permanent place of abode: Taxation Ruling IT 2650 provides guidelines for determining whether individuals who leave Australia temporarily to live or work overseas cease to be Australian residents for income tax purposes during their overseas stay. The ruling focuses on the application of the 'domicile' test. 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 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 their 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 in Country A, so your domicile of origin is Country A. You have obtained a Partner (Temporary) visa. This is a migration visa. By obtaining this visa you indicate your intention of making your home indefinitely in Australia. Thus, your domicile of choice is Australia. You do not have a migration visa for Country D. Since commencing work in Country D you have had one and three month tourist visas and now hold a six month business visa. You have not provided any indications of making your home in Country D on a permanent basis. Consequently, you have retained your Australian domicile during your overseas employment. | 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 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 either 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. In your case, · you have worked and resided in Country D since the commencement of your contract · your employment contract is open-ended but you initially accepted it on a 12 month basis · you are undecided if you will renew your contract · you return to Australia to be with your partner and child during leave periods · your family has remained in Australia in the family home which you are a tenant in common with your partner · you live in employer provided accommodation in Country D which can be said to be temporary in nature · whilst your parents live in Country A and you have stored personal items at their house, you have established a new place of abode in Australia with your partner · you have established social and sporting connections in Australia, and · in Country D you have no other connections. Consequently, it is considered that you did not establish a permanent place of abode outside of Australia while working in Country D. You are therefore a resident of Australia under the domicile and permanent place of abode test from when you left Australia to work in Country D to 30 June 2011. As you have met this test, it is not necessary to examine the application of the 183 day or the superannuation tests. | Detailed Reasoning - Conclusion: You were an Australian resident for tax purposes for the period 1 July 2010 to 30 June 2011, inclusive, as you met either the resides test or the domicile test during that period. | Detailed Reasoning - Foreign employment income: Subsection 23AG(1) of the ITAA 1936 provides that where a resident is engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that service will be exempt. Foreign service includes service in a foreign country in the capacity as an employee (subsection 23AG(7) of the ITAA 1936). Foreign earnings include salary and wages income (subsection 23AG(7) of the ITAA 1936). Subsection 23AG(1AA) of the ITAA 1936 provides that foreign earnings are not exempt from tax unless the continuous period of foreign service is directly attributable to any of the following: · the delivery of Australian official development assistance by your employer (generally provided by AusAID or the Department of Foreign Affairs and Trade) · the activities of your employer in operating a public fund covered by the deductible gift recipient categories, overseas aid fund and developed country disaster relief fund · the activities of your employer where they are a charitable or religious institution which is income tax exempt because they are located outside Australia pursuing objectives principally outside of Australia · deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or the Australian Federal Police), or · an activity of a kind specified in the regulations. In your case, your foreign service is not directly attributable to any of the five categories listed above as you are employed by a company which provide services to an aid agency in Country D. As you do not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936, your employment income for the year ended 30 June 2011 derived from Country D is not exempt from income tax in Australia under subsection 23AG(1) of the ITAA 1936. | Detailed Reasoning - Foreign income taxed in Australia?: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) states that the assessable income of an Australian resident includes income derived from all sources whether in or out of Australia, during the income year. Generally, salary and wage income is considered to be income assessable under section 6-5 of the ITAA 1997. As you are a citizen of Country A it is necessary to consider the effect of any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act) in determining liability to Australian tax on your Country D sourced salary and wages. The Agreements Act contains the double tax agreement between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by Australian and Country A residents. Article 4 of the Country A Agreement operates to categorise a person as either a resident of Australia or a resident of Country A. The application of the rules of Article 4 is designed to ensure that no person will be regarded as a resident of both Australia and Country A. Article 4(1)(a) of the Country A Agreement defines an Australian resident as meaning an Australian resident for the purposes of Australian tax. As discussed above, you are considered to be an Australian resident for the purposes of Australian tax. Article 4(1)(b) of the Country A Agreement defines a Country A resident as a person who is liable to tax in Country A by reason of his domicile, residence, place of incorporation or any other criterion of a similar nature but not if he is liable to tax in Country A in respect only of income from sources in Country A. You have advised you are taxed on all of your sources of income worldwide by the Country A tax authorities. Thus, you are considered to be a Country A resident for the purposes of Country A tax. As you are a dual resident, the tiebreaker test needs to be considered in Article 4(3) of the Country A Agreement. This provides that were a person is a resident of both countries, his residency status is determined in accordance with the following rules: (a) he shall be deemed to be a resident solely of the country in which he has a permanent home available to him (b) if he has a permanent home available to him in both Australia and Country A or if he does not have a permanent home available to him in either country, he shall be deemed to be a resident solely of the country in which he has an habitual abode, (c) if he has a habitual abode in both Australia and Country A, or he does not have a habitual abode in either of them, he shall be deemed to be a resident solely of the country with which his personal and economic relations are the closer. In your case you have a permanent home available to you in Australia with your partner and child to which you return when on leave from your employment in Country D. Your parents live in Country A and whilst you store some of your personal items at their house, you have not visited Country A or lived there for a number of years. Therefore you are not considered to have a permanent home available to you in Country A. Therefore from the facts provided, you are regarded as an Australian resident for the purposes of the Country A Agreement. However, the tiebreaker rule does not change a taxpayer's residency status for domestic law purposes. Article 15(1) of the Country A Agreement provides that salary, wages and other similar remuneration derived by a resident of Australia is taxable only in Australia unless the employment is exercised in Country A. If the employment is exercised in Country A then the remuneration may also be taxed in Country A. As you are a resident of Australia for the purposes of the Country A Agreement, and your employment was not exercised in Country A, your salary and wages attributable to your Country D employment will be taxable in Australia only.

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