Private ruling: Residency and foreign income tax offset
Date of advice: 25 July 2018
Published: September 2018
Ruling period: Period ending 30 June 2011 | Period ending 30 June 2012
Date scheme commenced: 1 July 2010

Ruling: Q1: Was individual A an Australian resident for tax purposes during the period they worked in Country B? | A1: Yes | Q2: Is individual A entitled to a Foreign Income Tax Offset for tax paid on the income derived in Country B in the 2011 and 2012 financial years? | A2: Yes

Relevant facts and circumstances: You were born and lived in Australia. You are the sole director of an Australian company. Your company was contracted to another Australian company to provide insurance loss adjuster services. The services were provided overseas. You entered the overseas country for the first time in mid-late 2010. For the calendar year 2010 you were in the foreign country for 66 days. For the calendar year 2011 you were in the foreign country for 218 days. When in the foreign country you stayed in hotels and travelled with the required clothing, toiletries and no other personal items. You returned to Australia for 7-10 days per month. Your company invoiced the other company B each month for the days you spent in the foreign country and your company was paid a flat rate for each day you worked plus travel and meals. You were a tax resident of foreign country and was required to lodge income tax returns in that country as an individual. Returns were lodged for the 2011 and 2012 financial years. You were assessed on $XX,XXX in 2011 and paid $XXXX tax You were assessed on $XXX,XXX 2012 and paid $XXXXX tax. You have lodged an Australian income tax return for the 2011 income tax year but not for the 2012 year. In lodging your 2011 Australian return, you included net primary production income of $XX,XXX as your total income. There was not any salary or wages income included on the return. Your company has not lodged Australian income tax returns for the 2011 or 2012 tax years.

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

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. Section 995-1 of the 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. In your case, although you were physically absent from Australia for a part of the year, there are various factors that indicate that you did not cease to be a resident of Australia. These are primarily: ● You returned to home on a monthly basis during the period you worked in country B ● You had an established pattern of residence in Australia that you did not completely sever. ● You maintained your family home in Australia whilst you were in country B ● Your business administration and maintenance were conducted in Australia. ● When present in country B you stayed in hotel temporary accommodation Based on the above, you retained a continuity of association with Australia while you were overseas and were residing in Australia according to the ordinary meaning of the word. Therefore, you were a resident of Australia under the ‘resides’ test of residency. | Detailed Reasoning - Personal services income: You carried out services on behalf of your company in country B and it is evident that the income received was for your skills, knowledge, expertise or efforts. Therefore, the income derived by your company was your personal services income. We note that you were paid a daily rate for the services performed, the services were provided to one client, you did not employ anyone else to carry out the services and did not have a business premises from which the services were provided. Therefore, you did not meet the results test, or any of the other three personal services tests, and the PSI rules therefore apply to attribute the income derived by your company in the 2011 and 2012 income years to you. | Detailed Reasoning - Foreign income tax offset: Subsection 770-10(1) of the ITAA 1997 provides that a taxpayer is entitled to a foreign income tax offset for foreign tax paid in respect of an amount that is included in the taxpayer's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year. Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953 (Agreements Act)), has been correctly imposed in accordance with that tax treaty (subsection 770-15(1) of the ITAA 1997). | Detailed Reasoning - Double tax agreement with Country B: In determining a taxpayer’s liability to pay tax in Australia and claim a foreign income tax offset it is necessary to consider not only the domestic income tax laws but also any applicable double tax treaty/agreement. Section 4 of the 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 any provision in an Agreement listed in section 5 has the force of law. The agreement between Australia and country B is listed in section 5 of the Agreements Act and operates to avoid the double taxation of income received by residents of Australia and country B In this case, you carried out services on behalf of your company in country B and paid income tax in country B on this income. Therefore, it is necessary to see if the country B tax was correctly imposed in accordance with the agreement. Article 7 of the agreement deals with business profits and provides that the profits of an enterprise of Australia will be taxable only in Australia unless the enterprise carries on business in country Bd through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in country B but only so much of them as is attributable to that permanent establishment. Article 5 of the agreement states that an Australian enterprise will have a permanent establishment in country B in circumstances which include: ● where the enterprise performs services in country B through an individual who is present in country B for a period or periods exceeding in the aggregate 183 days in any twelve month period, and ● more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in country B through that individual (paragraph 4(a)(i)). Based on the information provided, you were present in country B performing services for your company which exceeded in the aggregate 183 days in two consecutive twelve month periods and more than 50% of the gross revenues of the company were attributable to the services performed. Therefore, under the agreement, country B had the right to tax the profits of your company from the services carried out by you in company B if it wished to do so. However, we note that country B chose to tax you personally on the income derived instead of your company Article 14 of the agreement states that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment will be taxable only in Australia unless the employment is exercised in country B. If the employment is so exercised, the remuneration derived may be taxed in country B but only where the recipient is present in country B for a period or periods exceeding in the aggregate 183 days in any twelve month period commencing or ending in the year of income of country B. Based on the information provided, you were present in country B performing services for your company for periods exceeding in the aggregate 183 days in two consecutive twelve month periods. Therefore, under the agreement, country B had the right to tax the income derived from the services provided by you if your relationship with your company was ignored, for example, if a ‘look-through’ approach was adopted. Consequently, in applying the agreement, country B effectively had a right to tax the income derived by you for the services provided in country B one way or another. Therefore, it is considered that country B tax was correctly imposed by country B in accordance with the agreement. | Summary: You are entitled to claim a foreign income tax offset for the tax paid as the income derived is included in your income under Australia’s domestic income tax law and you paid tax on this income in country B. Your company has not been assessed on the income in country B and will also not be assessed on the income in Australia. Therefore, the foreign income tax offset rules do not apply to the company.