Private ruling: Residency and business income
Published: March 2015
Ruling period: Year ended 30 June 2013 | Year ended 30 June 2014
Date scheme commenced: 1 July 20XX

Ruling: Questions and answers | 1. Are you a resident of Australia for income tax purposes? | No. | 2. Is your foreign source income assessable in Australia? | No. | 3. Is your business income assessable in Australia? | No.

Relevant facts and circumstances: You country of origin is Country Y. You are a citizen of Australia. You were a resident of Australia for tax purposes prior to leaving Australia in 20XX. You state that you became a non-resident for tax purposes from when you departed Australia. You travelled to various countries including Country Y and Country Z. You were granted permanent residency of Country Y and Country Z and then relocated to Country X. You have been living in the Country X and operating your business in Country X for approximately 10 years. Your spouse is a citizen of Country X. You purchased a residential property in Country X. Your other assets in Country X include motor vehicles, shares and bank accounts. You were granted a permanent resident visa for Country X. In Country X, you are a member of a number of social institutions including a sporting club. You state that you intend to reside in Country X permanently, returning to Australia only to visit family members for short periods of time. You returned to Australia twice in each of the relevant income years for a total of less than five months in each year. The reason for the visits was to visit your relatives. You also visited friends and toured Australia as a tourist with your current spouse. You do not have a place to live in Australia. Your Australian assets include a motor vehicle and bank accounts. There is no significant amount in the bank accounts. You separated from your former spouse in 20XX and you had no children together. You have never been an employee of the Australian Commonwealth government. You are not on the Australian electoral roll and have had your name removed from the records of Medicare. You have advised the Australian financial institution you deal with, that you are a foreign resident. When entering or leaving Australia, you have stated for immigration purposes that you were a citizen of Australia who was not returning to Australia and was not a resident of Australia. Prior to departing Australia in 20XX you established a sole trader business here. You have operated your business from Country X for approximately 10 years. Since 20XX, and including the years of this ruling, you have lodged business activity statements (BAS) in Australia as a sole trader and have claimed GST credits. You state that you have generated export earnings for services from clients located outside Australia. These export earnings were your earnings as a sole-trader for services performed outside of Australia generated from clients outside of Australia whilst you were a non-resident of Australia. You have stated that your business clients are from foreign countries. Occasionally there are some from Australia but this is extremely rare. You state that you did not derive any business income from Australian clients during the relevant income tax years apart from one client from whom you derived a small amount. During the relevant years, your business had a representative office in Australia. The business address was sub leased and there was a contractual agreement to rent a virtual office. Under the arrangement, the phone was answered and mail and messages were on forwarded to you. There was no physical office presence. You state that no business activities were conducted from the Australian business address. You did not work from that address and you did not have any employees at that address. You engaged an Australian tax agent to complete and lodge your income tax returns for the relevant income tax years. The returns stated that you were an Australian resident for tax purposes and included your foreign business income, which you now state is incorrect. You lodged amendment requests for the relevant income years to remove your foreign business income on the basis that you were a non-resident. The amendments have not yet been processed.

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

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. 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 (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 meet the conditions of one of the other three tests. | Detailed Reasoning - The resides test: The ordinary meaning of the word 'reside', according to the Macquarie Dictionary , 2001, rev. 3 rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having 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'. 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 Australia. Instead, the test is whether the person has retained a continuity of association with a place in Australia, 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 ). In your case, there are various factors that indicate that you were not residing in Australia during the years in question. Specifically, you: • left Australia to live overseas; • have lived and worked in Country X for approximately 10 years; • were granted a permanent residency visa for Country X; • owned a residence in Country X; • had a spouse who is a citizen of Country X; and • did not have a place to live in Australia. Although you have connections to Australia through family members and your Australian registered business, it is considered that you were not residing in Australia according to the ordinary meaning of the word during the relevant income years. Therefore, you are not a resident of Australia under this test. | Detailed Reasoning - The domicile test: Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia. | 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. 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 your case, your country of origin is Country Y and you later changed your domicile to Australia when you moved here and became a citizen. You subsequently relocated to Country Y and then Country Z before you went to Country X and were eventually granted a permanent residency visa for that country. Therefore, you have demonstrated that you changed your domicile from Australia to Country X. Consequently, you are not a resident under this test as your domicile is no longer in Australia. | Detailed Reasoning - The 183 day test: Under the 183 day test, a person is a resident of Australia if they are actually physically present in Australia for more than 183 days in an income year unless the Commissioner is satisfied that their usual place of abode is outside of Australia and they have no intention of taking up residence here. Therefore, you are not a resident under this test as you did not spend more than 183 days in Australia during the relevant income years. | Detailed Reasoning - The superannuation test: A person will be considered a resident under the Commonwealth superannuation fund test if they currently contribute to certain superannuation funds for Commonwealth government employees. You are not a resident under this test as you were not eligible to contribute to certain superannuation funds for Commonwealth government employees during the relevant income years. | Summary: You are a non-resident of Australia for tax purposes for the relevant income years. As you are not a resident of Australia, your assessable income only includes income gained from sources in Australia. | Detailed Reasoning - Assessability of business income: During the relevant years, you operated your business from Country X. However, your Australian registered business also had a representative office in Australia during this period. Therefore, in determining whether some of your business income is assessable in Australia, it is necessary to consider not only the domestic income tax laws but also the double tax agreement between Australia and Country X. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (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, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The agreement with Country X is listed in section 5 of the Agreements Act. The agreement between Australia and Country X (the Country X agreement) operates to avoid the double taxation of income received by residents of Australia and Country X. Article H of the Country X agreement specifies that the business profits of an enterprise of one of the countries will be taxable only in that country unless the enterprise carries on business in the other country through a 'permanent establishment' situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other country, but only so much of them as are attributable to that permanent establishment. Therefore, a portion of the profits of your business may be taxable in Australia if it is found that you carried on business in Australia through a permanent establishment situated here. Article D of the Country X agreement defines a 'permanent establishment' as being a fixed place of business in which the business of the enterprise is wholly or partly carried on. A permanent establishment may include a place of management, a branch or an office. Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements states that the OECD Model Tax Convention and Commentary (OECD Model Tax Convention) provides appropriate guidance when interpreting the terms used in double tax agreements. Taxation Ruling TR 2002/5 Income tax: Permanent establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) provides additional guidance on the concept of 'permanent establishment' with reference to the OECD Model Tax Convention. Paragraph 18 of TR 2002/5 states the following: The Commentary on the Permanent Establishment Article (Article D) of the OECD Model Tax Convention says that the general definition of PE outlined in the previous paragraph: '… contains the following conditions: • the existence of a "place of business", i.e., a facility such as premises or, in certain instances, machinery or equipment; • this place of business must be "fixed", i.e., it must be established at a distinct place with a certain degree of permanence; • the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.' In your case, you had a contractual agreement to rent a virtual office in Australia. Under the arrangement, the phone was answered and mail and messages were on forwarded to you. There was no physical office presence, business activities were not conducted from the business address, you did not work from that address and you did not have any employees at that address. Consequently, it is considered that the office in Australia was merely an initial contact point and messaging service for your business. There were no employees at that address and no income earning activities were carried out at that address. Based on the information supplied and the guidance provided by TR 2002/5, you did not carry on business in Australia through a permanent establishment situated here. Therefore, the Country X agreement provides that your business income is only taxable in Country X.