Private ruling: Residency
Date of advice: 22 September 2016
Published: November 2016
Ruling period: Year ended 30 June 2015 | Year ended 30 June 2016
Date scheme commenced: 1 July 2014

Ruling: Q1: Were you a resident of Australia for income tax purposes? | A1: Yes

Relevant facts and circumstances: You are an Australian citizen. You were born in Australia. You were a resident of Australia for income tax purposes prior to your departure. You undertook employment in the overseas country. You were employed in the overseas country for a period of time less than the amount of time specified in your contract. This was due to you being transferred back to Australia. You were granted a two year residency permit in the overseas country through your employer. You advise you did not choose to transfer back to Australia and it was not expected. Your employer was subject to a take-over by another company and this led to changes to your employment contract. You advise that you are negotiating a contract to return to work in the overseas country. You rented a house in the overseas country which you furnished at your own expense. Your living expenses in the overseas country were paid by yourself, aside from gas and electricity which were supplied by your employer. You engaged a maid and gardener at your own expense. Your spouse remained in Australia, they did not move to the overseas country with you. Prior to your departure you resided in a house with your spouse. The home is owned in your spouse's name only. When you relocated to the overseas country your spouse continued to live in the home. Household effects remained in your home in Australia. Your spouse travelled to the overseas country to visit you. One of your children was attending school in Australia and you did not consider it an option to remove your child from schooling in Australia. Both of your children travelled to the overseas country to visit you. Whilst working in the overseas country you sent funds back to Australia to support your family. During your employment in the overseas country you returned to Australia to visit your family. Upon your return visits to Australia you stayed in your home, owned by your spouse. You continuously lived in the overseas country during your employment period except for the holidays back to Australia. By the overseas country's law you were a resident of the overseas country for tax purposes. You lodged foreign income tax returns whilst you were living overseas. You advise your work arrangement was such that you were required to be a resident in the overseas country. You were taxed in the overseas country by your employer. You participated in a number of social organisations in the overseas country and you were involved in the community through various gatherings. Whilst in the overseas country you purchased some household effects. All of these items were either sold or given away on leaving the overseas country. Whilst being employed in the overseas country you did not hold any real estate property in your own name in Australia or the overseas country. Whilst in the overseas country you did not contribute any funds into your super fund. Whilst in the overseas country you were removed from the Australian electoral role. Prior to leaving Australia for the overseas country you sold your car. You notified your private health insurer of your relocation to the overseas country. Your employer provided you with health insurance in the overseas country. You did not maintain any gym or sporting club memberships in Australia. Your spouse's car in Australia is registered in your name, to utilise previous employment benefits. Your role prior to moving to the overseas country was backfilled by another person and there were no guarantees of a future role with that employer. You maintained your Australian bank account. You maintained some Australian investments. You received some income whilst overseas from the investments. Whilst in the overseas country you did not earn any Australian salary. Upon your return to Australia, after your transfer back from the overseas country, you were a permanent employee of the takeover company in Australia, on a new contract. You are not a Commonwealth of Australia employee nor do you or your spouse have a Commonwealth Government superannuation account. You departed for another overseas country and you are currently working in the other overseas country.

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

Reasons for decision: Summary: 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 (and permanent place of abode) 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. 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. Where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be an Australian resident if they meet the conditions of one of the other tests. Relevant to your situation are the first two tests which are examined in detail in Taxation Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650). In examining these tests, IT 2650 provides a number of factors which assist in assessing a taxpayer's situation against the tests. A copy of this ruling is available from www.ato.gov.au . | Detailed Reasoning - The resides test: The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes its ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936. The question of whether an individual 'resides' in a particular country is a question of fact and degree and not of law. In deciding this question, the courts have consistently referred to and taken into account the following factors as being relevant: (i) physical presence in Australia (ii) nationality (iii) history of residence and movements (iv) habits and "mode of life" (v) frequency, regularity and duration of visits to Australia (vi) purpose of visits to or absences from Australia (vii) family and business ties to different countries (viii) maintenance of place of abode. 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 a place. Instead, the test is whether the person has retained a continuity of association with a place, 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 ). Generally the Commissioner considers that it is difficult for a taxpayer to demonstrate that they have ceased to be a resident of Australia where a place of residence remains available to them in Australia and/or where their spouse remains living in Australia. In these situations, it may be considered that the taxpayer meets the resides test as they have retained a continuity of association with Australia. Further, they may also meet the domicile test as the Commissioner may not be satisfied that they have a permanent place of abode outside Australia. Examples of decisions of this type can be found in Iyengar and Federal Commissioner of Taxation [2011] AATA 856 and Sneddon and Commissioner of Taxation [2012] AATA 516. In the more recent case of Shord and Federal Commissioner of Taxation [2015] ATC 355 one of the factors leading to the conclusion that the taxpayer was a resident of Australia was the taxpayer's emotional connection to his spouse who resided in their house in Western Australia. It was considered that the taxpayer maintained a continuity of association with Australia mainly through his spouse and property in Australia. There are various factors that indicate that you were still residing in Australia, as follows: • Your spouse and child did not join you in the overseas country, they remained in Australia, in the family home, which is owned in your spouse's name • You left your fully furnished home in Australia which was available to you during your stays in Australia • You made return visits to Australia during the period you were employed in the overseas country to visit your family • You sent funds sourced from your income earned in the overseas country to financially support your family • You maintained an Australian bank account • Prior to departing Australia you were an Australian resident • You were employed on a contract that was expected to last for longer but your employment time in the overseas country ended early • You were on an employer initiated visa • You have a higher value of assets in Australia than in the overseas country. We consider that your circumstances are closely aligned with Iyengar, where the taxpayer was found to be a resident, despite living and working overseas from May 2007 to December 2009. The AATA stated that the taxpayer retained a 'continuity of association' with Australia during the relevant income years, which included the following: • Mr Iyengar's wife, son and daughter remained in Perth during the relevant period (except for three short visits by his wife to Dubai) • His family home in Perth • His harmonious marriage with his wife • He returned almost all of his income he earned whilst working overseas to Australia for the purpose of paying the mortgage on his Perth home. In your case, we consider it significant that your spouse and child did not join you in the overseas country. Your spouse and child decided not to join you as your child was engaged in educational programs in Australia of which you did not want to disrupt. Whilst we recognise that this factor led to the decision for your spouse and child to remain in Australia, it was not a situation that could be considered as unusual or out of the ordinary, nor was it unforeseen circumstances. The fact remains that your family remained living in your Australian home which remained available for your use during the time you were overseas. You had economic ties to the overseas country by way of your employment along with some social connections by way of participating in social organisations and gatherings. You also purchased some personal effects, such as furniture, in the overseas country. However, your economic ties and social ties to Australia were stronger. Your fully furnished place of residence in Australia was maintained, your spouse and child remained living in Australia, you returned to Australia to visit your family, you have assets in Australia by way of your bank account, furniture and other household belongings, and other investments. Consequently, we consider that, on balance, your intention to work overseas for a period of at least two years was outweighed by the continuity of association you retained with Australia. Based on these facts, you were residing in Australia according to the ordinary meaning of the word. Therefore, you meet the 'resides test' and you were a resident of Australia for tax purposes. Whilst it is not necessary to meet more than one test to determine residency for tax purposes (we have already established that you are a resident under the 'resides' test), we will also include a discussion of the 'domicile and permanent place of abode' test as an alternative argument. | Detailed Reasoning - The domicile test: Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia. Domicile is the place that is considered by law to be your permanent home. It is usually something more than a place of residence. | 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'. A person may acquire a domicile of choice in another country if they have the intention of making their 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 prove an intention to make his or her home indefinitely in that country. The intention needs to be demonstrated in a legal sense, for example, by way of obtaining a migration visa, becoming a permanent resident or becoming a citizen of the country concerned. In this regard paragraph 21 of IT 2650 states that: 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 e.g., through having obtained a migration visa. A working visa, even for a substantial period of time such as 2 years, would not be sufficient evidence of an intention to acquire a new domicile of choice. In your case, your domicile of origin is Australia and there is no evidence to show that you have taken any steps to change your domicile to any other country. Therefore, your domicile was still Australia. Therefore, you will be a resident of Australia under the domicile test unless the Commissioner considers you have established a permanent place of abode outside of Australia. | Detailed Reasoning - 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 Commissioner's view on what constitutes a permanent place of abode is contained in IT 2650. Paragraph 23 of IT 2650 sets out the following factors which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode: (a) the intended and actual length of the taxpayer's stay in the overseas country; (b) whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time; (c) whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia; (d) whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence; (e) the duration and continuity of the taxpayer's presence in the overseas country; and (f) the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on. In relation to the weight to be given to each of the above factors, paragraph 24 of IT 2650 states: The weight to be given to each factor will vary with the individual circumstances of each particular case and no single factor will be decisive… however… greater weight should be given to factors (c), (e) and (f) than to the remaining factors, though these are still, of course, relevant. In your case it is considered that you have not established a permanent place of abode outside of Australia because: • You left a fully furnished home in Australia, which your spouse owns, in which your family lived whilst you were away and was available to you • Your child remained in Australia to continue their education in Australia, accompanied by your spouse • You have an employer initiated permanent residency visa for the overseas country • Your employment was via a year contract which ended early. Upon completion of your employment in the overseas country you returned to Australia (via your employer advising you to be transferred to Australia) • Whilst you have rental accommodation solely for your use, your family did not join you, therefore you have not set up an established home with family in the overseas country • You maintained your Australian bank account and other Australian investment • You returned to Australia four times to visit your family. In Federal Commissioner of Taxation v. Applegate 79 ATC 4307 ( Applegate ), the Full Federal Court held that the particular taxpayer was not a resident of Australia for taxation purposes, because he had a permanent place of abode outside Australia. The court relied on the fact that the taxpayer had surrendered the lease on his flat in Australia, disposed of all his other assets in Australia, and his spouse and child moved to reside with him in the other country, where he maintained a yearly lease on a house. By contrast, the Administrative Appeals Tribunal (AAT) held in the case of Re Shand and FCT [2003] AATA 279, 2003 ATC 2080 ( Shand's Case) a taxpayer who spent almost half of the relevant income years in Kuwait on business was a resident of Australia for tax purposes primarily because he could not be considered to have abandoned his residence or place of abode in Australia. Your circumstances are similar to Shand's case in which the AAT concluded that the taxpayer's accommodation in Kuwait was only a transitory or temporary place of abode used solely for business purposes. His wife did not accompany him. Similarly in your case your accommodation in the overseas country is only transitory and used for your employment. You did not have long term plans to settle there on completion of your contract. You maintained a permanent home in Australia that was available to you at all times. You held assets in Australia. As in Shand's Case , your emotional ties are clearly with Australia particularly in terms of your family. 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). You have noted that intention plays a significant role in determining whether you would be considered a resident of Australia. You had intended to work in the overseas country for a greater period than your actual stay. You are in the process of renegotiating a contract in the overseas country with the expectation you will return to work there. In your case, although you intended to work overseas for a period of time and you established a place to live in the overseas country paid for by yourself, you did not abandon your residence in Australia, as it was still available to you. You retained a durable association with Australia, in particular your spouse and child remained in Australia, maintenance of some of your assets, your return trips to Australia and via returning funds back to your family in Australia. The durable association is considered to be the determining factor that you had not established a permanent place of abode in the overseas country, not the fact that your actual stay was less than your intended stay. Consequently, the Commissioner is not satisfied that you had a permanent place of abode outside Australia and you are, therefore, a resident under the domicile test of residency during the period you were in the overseas country. | Detailed Reasoning - Your residency status: As you meet the resides and domicile tests of residency, 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 - Double Tax Agreement: Australia has double tax agreements with more than 40 countries worldwide. The main purpose of double tax agreements is to avoid double taxation as well as to prevent taxation evasion. In addition, these agreements often settle differences of interpretation and provide a system for consultation and resolution of disputes between the tax administrations of Australia and another country. In determining liability to tax on foreign sourced income received by an Australian resident taxpayer it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 . If there is no relevant tax treaty, the income will be taxed according to Australian income tax laws. In this case, the overseas country does not currently have a tax treaty with Australia and therefore the assessability of the income you receive from the overseas country is determined on the basis of Australian income tax law. | Detailed Reasoning - Foreign income tax offset: If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset. Subsection 770-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997) provides for a foreign income tax offset (FITO) for an income tax year for foreign income tax paid in respect of an amount that is included in assessable income. 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 assessable 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. Section 770-75 of the ITAA 1997 provides that you have to work out your foreign income tax offset limit if you are claiming a foreign income tax offset of more than $1,000. This may result in your tax offset being reduced to the limit. Any foreign income tax paid in excess of the limit is not available to be carried forward to a later income year and cannot be refunded to you. You will be deemed not to have paid foreign income tax to the extent that you or any other associated entity become entitled to a refund of the foreign income tax (section 770-140 of the ITAA 1997). Instructions on how to calculate the amount of the foreign income tax offset can be found in the Guide to foreign income tax offset rules 2016 available at www.ato.gov.au.