Private ruling: Residency
Date of advice: 31 July 2017
Published: November 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and answer | 1. Are you a resident of Australia for taxation purposes? | Yes. | 2. Are you a resident of Australia under article 4 of the country A Agreement? | No. | 3. Is your country A Employer severance/termination pay assessable in Australia? | No. | 4. Are your country A employer stock options assessable in Australia? | No | 5. Is your country A employer pension assessable in Australia? | No. | 6. Is your country A government Social Security payment assessable in Australia? | No. | 7. Is your country A rental income assessable in Australia? | Yes. | 8. Are you entitled to a foreign income tax offset for the rental income? | Yes. | 9. Are country A capital gains/loss on country A equities assessable in Australia? | No. | 10. Are country A dividends from country A companies assessable in Australia? | No.

Relevant facts and circumstances: You are a country A citizen and a tax resident of country A. Your permanent residence is in country A. Your income assets and investments are in country A. One of your children lives in country A and is not a dependant. Your first spouse passed away # years ago and # years ago you re-married an Australian citizen. Your employment in country A was terminated on #. You have received a severance payment from your employer which was spread over 12 months from # to #, commencing before you arrived in Australia. Your spouse was in Australia looking after close family, so you decided to retire so you could spend time with them. You arrived in Australia on # and stayed until #. You entered Australia on a Subclass 100 Spouse Migrant Visa which allows you to stay for 5 years and re-entry has an expiration date. Your income and savings from country A support your stay in Australia. You do not derive any income from Australian sources. You and your spouse have a joint bank account in Australia that you use to transfer money to your spouse from country A. You live in your spouse’s home when you are in Australia. The property is not jointly owned by you. You may need to spend more than 6 months per year in Australia as your spouse does not want to leave her ailing mother for too long. When your spouse’s family member passes away your spouse will move to America to live with you permanently. You and your spouse are not eligible to contribute to the relevant Commonwealth super fund.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 995-1(1). | Income Tax Assessment Act 1997 section 6-5 | Income Tax Assessment Act 1997 section 855-20 | Income Tax Assessment Act 1936 subsection 6(1) | International Tax Agreements Act 1953

Reasons for decision: Summary: 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 . The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are the: ● resides test ● domicile and permanent place of abode test ● 183 day test and ● Commonwealth superannuation fund test. The primary test for deciding the residency status of each individual is whether they reside in Australia according to the ordinary meaning of the word resides. If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian tax purposes has been established. | Detailed Reasoning - The resides (ordinary concepts) test: The Commissioner’s view on the 'resides test’ is contained in Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia (TR 98/17). An individual may be considered a resident under the resides test if their behaviour while they are here is such that they exhibit a degree of continuity, routine or habit that is consistent with a person residing in Australia according to the ordinary meaning of the word 'reside’. Factors that can be taken into account when ascertaining the character of a person’s behaviour include the intention or purpose of the individual’s stay in Australia, presence of family in Australia, location of assets and social and living arrangements. As a broad principle, where a person has a settled routine for six months or more (for example, the person has stayed in one place or has been with one employer for six months at the same location) they may satisfy the 'resides test’. The period of time of the settled routine need not be confined to one financial year. As long as the pattern of behaviour is exhibited the individual may be regarded as being a resident from the time of their arrival. In your case, we note that: ● You lived with your spouse in Australia for just over 6 months and in the future you may need to spend more than 6 months in Australia with your spouse. ● Your spouse is an Australian citizen residing in Australia. ● When you are in Australia you live with your spouse in their home. Based on the above, it is considered that you established a settled routine in Australia during the seven months you were living here with your spouse. Consequently, your day to day activities were consistent with residing in Australia according to ordinary concepts. Therefore, you satisfied the 'resides test’ of residency and none of the other tests need be applied. Section 4 of the International Tax Agreements Act 1953 (ITAA 1953) provides for it to be incorporated with, and read as one with, the ITAA 1997 and ITAA 1936. A Double Taxation Agreement is an agreement entered into by two countries for the purpose of avoiding double taxation and preventing fiscal evasion with respect to income taxes. Relief from double taxation is achieved by the contracting countries reciprocally agreeing to forego taxation on certain categories of income. As you are an Australian resident for income tax purposes and Country A also considers you a resident for tax purposes, it is necessary to consider the tie breaker rules in the Convention between the Government of Australia and the Government of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (DTA). Residency provisions under DTA Article 4(2) of the country A Agreement provides tests of residency that are used where the individual is a resident of the two countries (tie breaker tests). The tie breaker tests ensure that the individual is a resident of one country for the purposes of working out liability to tax on their income. The tie breaker rules do not change a taxpayer’s residency status for domestic law purposes. Article 4(1)(a) provides that a person is a resident of Australia if they are resident of Australia under Australia’s domestic tax law and are subject to Australian tax on income which is from sources within Australia. You will be an Australian resident while you are here for your studies. You will be subject to tax on income from sources in Australia. Article 4(1)(b) provides that a person is a resident of country A if they are a resident of country A under country A domestic tax law and is subject to tax in country A. You will remain a resident of country A for tax purposes for the duration of your studies in Australia and you will pay tax there on your income. Article 4(2) provides that where an individual is resident of both countries under Article 4(1) they will be deemed to be resident of the country in which they maintain a permanent home. The term 'permanent home available’ to him in Article 4(2) is not defined in the country A Agreement. However, the article goes on to state that in determining an individual’s permanent home regard shall be given to the place where the individual dwells with his family. Additionally, paragraph 104 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that the OECD Model Tax Convention and Commentary (OECD Commentary) will often need to be considered in interpreting tax treaties. The OECD Commentary provides that in relation to a 'permanent home': (a) for a home to be permanent, an individual must have arranged and retained it for his or her 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. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) (b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room. At all times from #, you have had a permanent home available to you in both Australia (where your spouse has been living) and in country A (where you have been living). Therefore it is necessary to consider in which country you have a habitual abode, and if necessary where your personal and economic relations are closest. Article 4(2)(b) states that if a person has a permanent home in both countries then the country in which the taxpayer has an habitual abode needs to be considered. The Article goes on to say that in determining a person’s permanent home regard shall be given to the place where the person dwells with his family. In relation to a habitual abode, the OECD Commentary states that all stays in each country, regardless of the purpose for the stays, must be considered in order to assign a preference to a particular country. Further, the comparison must be made over a sufficient length of time for it to be possible to determine whether the presence in each country is habitual and to also determine the intervals at which the stays take place. The notion of a habitual abode is not simply a test of where a person stays more frequently but also looks to whether living in a particular country is normal or customary having regard to the taxpayer's circumstances. In your case, you are retired and your permanent residence is in country A, when you are away in Australia your son looks after it for you. Your spouse lives in Australia and owns a property. You live with your spouse in her property when you are in Australia. Your last visit to Australia was over 6 months and future visits will possibly be longer. Accordingly, it is considered that you have a habitual abode in Australia and in country A, therefore, your personal and economic relations will need to be considered. In relation to a taxpayer's personal and economic relations, the OECD Commentary states that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business. If your residence can not be determined under article 4(2)(a) or 4 (2)(b) then under article 4(2)(c) consideration needs to be given to where your personal and economic relations are closest. The article goes on to provide that regard will be given to citizenship. In your case, you live with your spouse while you are in Australia and you have family in country A. Your personal ties are in country A and Australia. Your economic ties are solely in country A except for a joint bank account you use to transfer money from country A to your spouse in Australia. You are a citizen of country A, therefore, you are country A resident. We then need to look at the DTA to determine whether the income you receive is taxable in Australia. | Detailed Reasoning - Country A Employer severance/termination pay: Article 15 of the DTA states that salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment or in respect of services performed as a director of a company shall be taxable only in that State unless the employment is exercised or the services performed in the other Contracting State. If the employment is so exercised or the services so performed, such remuneration as is derived from that exercise or performance may be taxed in that other State. In your case, the severance/termination pay is from employment that was exercised in country A and is only taxable in country A. A foreign termination payment is not and ETP (subsection 82-135(f) of the ITAA 1997) The tax treatment of a payment received in consequence of termination of employment exercised in a foreign country is provided for in Subdivision 83-D of the ITAA 1997. Broadly, such a payment is tax free if the taxpayer was not an Australian resident during the period of employment (section 83-235 of the ITAA 1997). A foreign termination payment is not and ETP (subsection 82-135(f) of the ITAA 1997). Consequently we need to consider whether the payment you received from Country A is a foreign termination payment. The tax treatment of a payment received in consequence of termination of employment exercised in a foreign country is provided for in Subdivision 83-D of the ITAA 1997. Broadly, such a payment is tax free if the taxpayer was not an Australian resident during the period of employment (section 83-235 of the ITAA 1997). Section 83-235 of the ITAA 1997 sets out the conditions under which a payment will be a tax free termination payment in respect of a foreign resident period. These are that: n It was received in consequence of the termination of the taxpayer’s employment in a foreign country (paragraph 83-235(a) of the ITAA 1997) n It is not a superannuation benefit (paragraph 83-235(b) of the ITAA 1997) n It is not a payment of a pension or an annuity (whether or not the payment is a superannuation benefit) (paragraph 83-235(c) of the ITAA 1997) n It relates only to a period of employment when the taxpayer was not an Australian resident (paragraph 83-235(d) of the ITAA 1997). All the four conditions must be met for the payment to be treated as not assessable and not exempt income and hence tax free. In your case you were a foreign resident working in country A for a foreign employer until your employment was terminated on #. On # you became an Australian resident. Therefore, it is clear that you were not an Australian resident while employed in country A. Consequently, the payment will be exempt from tax in Australia. | Detailed Reasoning - Country A employer stock options and country A dividends from country A companies: Article 10 of the DTA looks at dividends and defines them as 'income from shares and other income assimilated to income from shares’. Article 10 of the DTA states that dividends paid by a company which is a resident of one of the Contracting States for the purposes of its tax, being dividends to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. As you are considered to be a resident of Country A under the tie breaker test in the Country A agreement you will not be assessable on these dividends in Australia. | Detailed Reasoning - Country A employer pension and country A government Social Security payment: Article 18 of the DTA states that an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that State. In your case, your country A employer and Social security pensions are only taxable in country A. | Detailed Reasoning - Country A rental income: Article 6 of the DTA states that income from real property may be taxed by the Contracting State in which such real property is situated. In your case, your rental property is in country A and may be taxed in country A. Rental income after deduction of expenses will be assessable in Australia as part of your worldwide income and a FITO will be allowed for tax paid in country A on this income. Please note that you may claim a Foreign Income Tax Offset (FITO) in your Australian income tax return. The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset. The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITO will need to be utilized in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income. Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income. Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement. | Detailed Reasoning - Country A capital gains/loss on Country A equities: Article 21 of the DTA looks at income that is not expressly mentioned in the DTA. Capital gains and losses are not mentioned and are, therefore, covered by Article 21. Article 21 states that items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of the Convention shall be taxable only in that State. In your case, any capital gains or losses will only be taxed in country A.