Private ruling: Residency and Foreign Sourced Income
Published: August 2013
Ruling period: 01 July 2010 to 30 June 2014
Date scheme commenced: 01 July 2010

Ruling: Q1: Is your income from employment in Timor Leste assessable income pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No

Relevant facts and circumstances: · You were born in Australia and are an Australian Citizen. · In 200X you left Australia to take up employment in Country A. · You currently hold a Temporary Residence Permit with Country A. The permit lasts for 2 years but is renewable. · To be issued a permit you must, among other things, demonstrate an intention to maintain a permanent basis in Country A. · You are currently employed with a construction company in Country A. · You role is visit construction sites in Country A on a daily basis and control all the construction works. · Your employments contract is ongoing (not for a fixed term). · Your employment contract was signed in Country A. · Your salary is paid into your Australian bank account. · You are single. Your former spouse and adult children live in Australia. You do not provide any financial support to your former spouse or adult children. · Prior to leaving Australia you rented a home. The lease was abandoned when you left Australia. · You return to Australia for short trips and visits to visit family and friends and attend sporting events of interest. · When you visit Australia you stay in short term accommodation like motels or with family and friends. · Since first leaving Australia in 200X you have never been present in Australia for more than half of any year of income. · You have no interest (freehold or leasehold) with any dwelling in Australia. · You own an undeveloped block of land in Australia and have a loan in relation to it. · You have a personal loan with an Australian Bank. · You have a savings account with a bank in Australia to which your wages from employment in Country A are deposited. · You have a superannuation account in Australia. · You are not enrolled to vote with the Australian Electoral Commission. · You are not a contributing member of a superannuation fund for Commonwealth government officers and do not have a spouse who is such a contributing member. · You intend on remaining in Country A indefinitely subject to continuing employment. · You have no intention to resume living in Australia in the foreseeable future. · If employment in Country A ceases, your plans depend on the availability of employment elsewhere including other international locations. · You currently rent a unit in Country A. · You have a bank account in Country A. · The vast majority of your personal belongings are in Country A. · You are involved in local community organisations within Country A.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 6-5 and | Income Tax Assessment Act 1936 subsection 6(1).

Reasons for decision: Summary: You are not considered a resident of Australia because you do reside in Australia or meet one of the three statutory tests of residency contained in subsection 6(1) of the Income Tax Assessment Act 1936 . That is you do not meet the domicile/permanent place of abode test because your permanent place of abode is not in Australia; you do not meet the 183 day test because you spend less then 183 days in Australia per income year and you do not contribute to Commonwealth superannuation funds. It is also considered that your income is not sourced within Australia. Therefore, as a non-resident your foreign sourced income is not assessable income. | Detailed Reasoning - Detailed reasoning: Section 6-5 of the ITAA 1997 provides the following: 6-5(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. 6-5(2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. 6-5(3) If you are a foreign resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. As outlined above, an Australian resident is subject to taxation on all sources of income during the year. A non-resident is generally only subject to income tax on its Australian sourced income. You are seeking advice in respect of your residency status and the source of your income in order to determine your liability to income tax. | Detailed Reasoning - Residency: An individual is an Australian resident if they reside in Australia (the 'ordinary concepts' test of residency) or satisfies one of the three statutory residence tests contained in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The residency tests contained in subsection 6(1) of the ITAA 1936 are: (a) Domicile/permanent place of abode test (b) 183 day test (c) Commonwealth superannuation fund test | Detailed Reasoning - Ordinary meaning test: The ordinary meaning test is the primary test for determining the residence of an individual. The definition of 'resident' in subsection 6(1) of the ITAA 1936 states that a person is a resident for tax purposes if they 'reside' in Australia. As there is no statutory definition of the term 'reside' in the legislation, the test requires determining whether you reside in Australia according to the ordinary meaning of that word. The Oxford English dictionary defines the term 'reside' as: 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 FC of T v Miller (1946) 73 CLR 93, Dixon J quoted the following statement by Huddleston B in Cesena Sulphur Co Ltd v Nicholson (1876) LR 1 ExD 428 at p 452: "There is not much difficulty in defining the residence of an individual; it is where he sleeps and lives…" You left Australian in 200X and have since lived in Country A. You visit Australia infrequently and for short periods to visit family and attend sporting events of interest. During your visits to Australia you stay in short term accommodation in the form of motels or stay with family or friends. You do not own or maintain a home in Australia and have no intention to resume living in Australia. You work in Country A on constructions projects and live in permanent accommodation. In light of the factors mentioned above, you are not considered to be residing in Australia as you are living and working in another country and you are only visiting Australia infrequently. | Detailed Reasoning - Domicile/permanent place of abode test: A person whose domicile is in Australia is deemed to be a resident of Australia unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia. Domicile is a legal concept, determined according to the Domicile Act 1982 and common law rules established by private international law cases. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of their father's and in some cases mother's permanent home. A person retains their domicile of origin unless and until they acquire a domicile by choice in another country, or until they acquire a domicile by operation of law. In regards to domicile Taxation Ruling IT 2650: Residency - Permanent Place of Abode Outside Australia states at paragraph 21: Generally speaking, persons leaving Australia temporarily would be considered to have maintained their Australian domicile unless it is established that they have acquired a different domicile of choice or by operation of law. In order to show 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…would not be sufficient evidence of an intention to acquire a new domicile of choice. You were born in Australia and resided in Australia until 200X. You have taken up permanent residence in Country A but remain an Australian Citizen. Your domicile is taken to be Australia as there is no evidence of permanent migration to Country A. The courts have considered a person's 'place of abode' is where they consider 'home'. In R v Hammond (1982) ER 1477, Lord Campbell CJ stated that: a man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression. A place of abode must exhibit the attributes of a place of residence or a place to live, as contrasted with the overnight, weekly or monthly accommodation of a traveller. The leading case on the existence of a permanent place of abode outside Australia is FC of T v Applegate 79 ATC 4307. In Applegate's case it was determined that the term 'permanent' is not used in the sense of everlasting, but it is used in contrast to temporary or transitory so that a person can have a permanent place of abode outside Australia even if they don't intend on living in that place indefinitely. In accordance with paragraph 23 of IT 2650 the following factors should be taken into account when determining whether a person's permanent place of abode is outside Australia: · the intended and actual length of the person's stay in the overseas country; · whether the persons intends to stay in the overseas country only temporarily then move onto another country or return to Australia at some definite point in time; · whether the person has established a home outside Australia; · whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence; · the duration and continuity of the person's presence in the overseas country; and · the durability of association the person has with a particular place in Australia. Length of stay In accordance with paragraph 25 of IT 2650 where a person leaves Australia for an unspecified and substantial period and established a home in another country, this is an indicator that they have a permanent place of abode outside Australia. A significant period of time is 2 or more years. You have left Australia for Y years and have lived in Country A since. Your intention is to remain indefinitely subject to continuous employment. You are considered as having resided outside Australia for a substantial period of time. Intention to return to Australia or travel elsewhere You have no intention to resume living in Australia at a definite point in time. Your intention is to live in Country A while employment remains available. Should such employment cease your plans would depend on the availability of employment elsewhere, including other international locations. Given this information, you are not considered to be travelling or working while travelling. Establishment of a home outside Australia You currently rent a unit in Country A. Previously you were living in accommodation provided by your employer. We consider this is a form of long term accommodation and as such, an establishment of a home outside Australia. Abandonment of Australian residence Prior to departing Australia for Country A in 200X you rented a home in Australia. The lease was abandoned when you departed Australia. You do not hold and interest (either freehold or leasehold) in a dwelling in Australia since that time. You are considered to have abandoned any residence in Australia because of your overseas absence. Duration and continuity of presence in overseas country You have continuously lived in Country A since 200X. You have a bank account in Country A. The vast majority of your personal belongings are in Country A. You have developed a number of connections with the local community in Country A. You also support local sporting events. Your visits to Australia are infrequent and brief and you visit family and friends and stay with them or in motels while in Australia. The duration and continuity of your presence in Country A is substantial despite having a brief period where you worked elsewhere and that you visit Australia occasionally. Durability of association with Australia Paragraph 28 of IT 2650 examines the relevance of bank accounts maintained in Australia in determining the extent of durability of association with Australia. A person who closes all bank accounts in Australia and transfers all of their funds to accounts in the overseas country would have little durability of association with Australia. A person who closes accounts for everyday use and maintains a long term investment account would need to establish that on the basis of other factors, they still have a permanent place of abode in the overseas country. You maintain both investment accounts and savings accounts in Australia. You maintain a bank loan in relation to an undeveloped block of land you own, a small personal loan and a savings account. In addition you also hold a superannuation account in Australia. Your salary is paid to your Australian savings account. You are not enrolled to vote with the Australian Electoral Commission. You do not have any dependants who live in Australia. However, you return to Australia to visit family and friends and attend sporting events. In light of the above factors, particularly the maintenance of your Australian bank accounts, it is considered that you have a moderate level of durability of association with Australia. | Detailed Reasoning - Conclusion: In consideration of all of the above factors, it has been determined that you have established a permanent place of abode in Country A. Whilst you maintain a moderate level of durability of association with Australia, this factor is outweighed by the length of time your have already lived in Country A and the fact that your employment is on an ongoing basis. In addition you have effectively abandoned any home you had in Australia and have made a permanent home and lifestyle for yourself in Country A. You are not considered an Australian resident under the Domicile/permanent place of abode test. | 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. This is a test of physical presence in which a person must be in Australia for more than half the income year. The Commissioner considers that it is meant to apply to visitors and migrants, rather than to Australians who are leaving the country. On the basis of the information provided in regards to your length of stay in Australia you would not spend more then 183 days in Australia per income year. Therefore this test does not apply to you as you are not present in Australia for more then 183 days. In addition, your usual place of abode is considered to be Country A. You are not an Australian resident under the 183 days test. | Detailed Reasoning - Commonwealth superannuation fund test: A person will be considered a resident under the Commonwealth superannuation fund test if they (or their spouse) currently contribute to certain superannuation funds for Commonwealth government employees. You are not a contributing member of the superannuation fund for Commonwealth government employees and do not have a spouse who is such a contributing member. You are not an Australian resident under the Commonwealth superannuation fund test. You are not an Australian resident according to its ordinary meaning nor under any of the statutory tests. As such, only your Australian sourced income is assessable under section 6-5 of the ITAA 1997. | Detailed Reasoning - Source: There is no specific definition for the term 'source' in the ITAA 1997. There are, however, a limited number of statutory source rules for particular types of income found in the ITAA 1936. Where none of these statutory rules apply, we need to determine the source of an item of income according to principles that have evolved from common law. In your case the statutory rules do not apply and the common law principles will be examined. The classic statement of the factors which are relevant in determining the source of wages or salary income is found in C of T (NSW) v Cam & Sons Limited (1936) 4 ATD 32. This case involved the source of salary and wages earned by fishermen involved in trawling both outside and inside NSW territorial waters. In the course of his judgment, Jordan CJ indicated that the source of services income depended on the following factors: · negotiating and obtaining the contract of employment · performing the work, and · payment for the services. This and subsequent cases have established that in the case of an ordinary contract for employment, the source of the income generally depends upon the place where the work is performed. The making of the contract and the place of payment are insignificant aspects of the processes leading to the derivation of the income. As Jordan CJ stated in Cam's case (4 ATD at p 34): In the ordinary course of the employment of a seaman...where there is nothing special, either in the circumstances of the contract of employment or in the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. An example of the importance of the facts in each case is the difference in findings in French v FC of T (1957) 98 CLR 398 and FC of T v Mitchum (1965) 113 CLR 401. In the former case the source was held to be where the services were performed while in the latter, it was found that the place where the contract was made and where the remuneration was paid was more important. Both cases dealt with the source of services income. In French's case, the taxpayer was an Australian resident who was employed as an engineer by an Australian resident company. The taxpayer was sent to New Zealand for a two week period by the company to act as an inspecting engineer for its New Zealand business. The sum payable for that two week period was included in two of the taxpayer's normal monthly salary payments into his Australian bank account. Except for that period, the taxpayer worked for the company in Australia during the financial year. The court held that the source of income earned under a normal contract of employment or contract for services is ordinarily the place where the employment or services are performed. Williams J. stated that "the locality of the source of income derived from personal exertion in the capacity of employee or in relation to any services rendered must be where such personal exertion took place." In Mitchum's case, the taxpayer was an American actor who entered into a contract to a Swiss company outside of Australia. Under the contract the taxpayer agreed to provide his services as an artistic consultant and as an actor in two films. These services were to be provided at such studios and locations as the company directed. The contract also specified that he would be entitled to remuneration even if the company failed to utilise his services as long as he had fulfilled or was ready to fulfil all the terms of the agreement. In fulfilling the agreement, the taxpayer provided his services in the production of a film that was partly produced in Australia. The taxpayer spent eleven weeks in Australia during this production. The court held that the source of the remuneration relating to the period in Australia was sourced outside of Australia. It was found that in this case more weight should be given to the place where the contract was made and where the remuneration was paid rather than to where the services were performed. The facts in your case are closer to those in French's case than in Mitchum's case. You are required to be physically present in Country A to carry out your duties on site at the construction sites. Your situation is not similar to Mitchum's case where creative talents and special knowledge were involved to such a degree that the place where those skills were exercised was relatively unimportant. The fact that you signed your contract in Country A and live in Country A as well as providing your services there is also significant. These factors outweigh the fact that the income was paid to your Australian bank account. It is concluded that the income you earned from working in Country A was sourced in Country A, not Australia. Therefore, as you are not a resident of Australia during the relevant period, your income from such employment is not assessable income.