Edited version of private ruling

Authorisation Number: 1011474525397

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Ruling

Subject: Medicare levy and Medicare levy surcharge

Question 1

If you are the nominated parent on a Medicare levy 'family agreement' are you liable for half the Medicare levy for your dependant child from your child's date of birth?

Answer

Yes.

Question 2

Are you liable for the Medicare levy surcharge (MLS) for your dependant child from your child's date of birth?

Answer

Yes.

This ruling applies for the following period

Year ended 30 June 2009

The scheme commenced on

1 July 2008

Relevant facts

You and your spouse are active members of the Australian Defence Force (ADF) and are 'prescribed persons' as defined in section 251U of the Income Tax Assessment Act 1936 (ITAA 1936).

Early in the 200X-0Y income year you were posted overseas. You were both entitled to free medical treatment while overseas.

You and your spouse remained residents of Australia for tax purposes while you were overseas. Your permanent home (domicile of origin) is in Australia.

Early in the 200Y-0Z income year your child was born overseas and was automatically granted citizenship of that overseas country. While overseas your child was covered by that country's private health insurance funded by the Australian government.

Your child did not return to Australia until you and your family moved back to Australia permanently early in the 200Z calendar year at the end of your fixed posting.

You and your spouse do not contribute to a Commonwealth superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 251

Income Tax Assessment Act 1936 Subsection 6(1)

Medicare Levy Act 1986 Section 8B, 8D

Reasons for decision

Paragraph 251S(1)(a) of the ITAA 1936 provides that a Medicare levy is levied at the rate applicable in the Medicare Levy Act 1986 (MLA 1986) from the 1984 year of income onwards on the taxable income of a person who at any time during the year was a resident.

Section 8D of the MLA 1986 provides the amount of Medicare levy payable by a taxpayer is increased by 1% of their taxable income and reportable fringe benefits where, for the whole of the period:

- they are a married person

- the family income (total taxable income and reportable fringe benefits) exceeds the family surcharge threshold

- they, or at least one of their dependants, are not covered by an insurance policy that provides private patient hospital cover, and

- they are not a prescribed person as defined in section 251U of the ITAA 1936.

This increase in the amount of Medicare levy payable is commonly known as the MLS. Under subsection 8D(4) of the MLA, where the period which a person qualified for the MLS is a part only of the income year the amount of MLS is attributable to that period only.

Dependant

Subsection 8D(1) of the MLA states that a dependant for the purposes of the MLA is determined by sections 251R and 251V of the ITAA 1936. Those sections provide that a person is a dependant of a taxpayer if the person, whose maintenance the taxpayer contributes to, is a resident of Australia and is:

- the spouse of the taxpayer

- a child of the taxpayer less than 21 years of age or

- a child of the taxpayer who is not less than 21 years of age but less than 25 years of age and receiving full-time education.

As can be seen from the discussion above, in determining whether you are liable for the Medicare levy and MLS for your child it is necessary to consider whether your child is a resident of Australia. The following paragraphs discuss residency status for taxation purposes.

Residency

You and your spouse remained residents of Australia for tax purposes while you were overseas. Your permanent home (domicile of origin) is in Australia

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA1936. The definition provides four tests to ascertain whether an individual is a resident of Australia for income tax purposes.  These tests are:

1. the resides test

2. the domicile test

3. the 183 day test, or

4. the Commonwealth superannuation fund test.

Where one or more of the above tests is satisfied, an individual will be an Australian resident for tax purposes.

The primary test for deciding residency status is whether a person resides in Australia according to the ordinary meaning of the word 'resides'. However, where the person does not reside in Australia according to ordinary concepts, the other tests must be considered in determining their residency status.

In your case the first two tests are relevant in determining if your child who was born overseas is a resident of Australia from birth. The last two tests do not apply as your child was not present in Australia for more than 183 in the 200Y-0Z income year and you and your spouse do not contribute to a Commonwealth superannuation fund.

Taxation Ruling IT 2650 contains guidelines for determining whether individuals who leave Australia temporarily (for example, on temporary overseas work assignments) cease to be Australian residents for income tax purposes during their overseas stay. This Ruling discusses the residency tests.

Residence according to ordinary concepts

As there is no definition of the word 'reside' in Australian income tax law, the ordinary meaning of the word needs to be ascertained from a dictionary.

The Macquarie Dictionary defines 'reside' as to dwell permanently or for a considerable time, to have one's abode for a time and the Shorter Oxford English Dictionary defines it 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.

Your child was born overseas and resided with you for some 198 days outside Australia returning to live in Australia permanently early in the 200Z income year.

Your child does not qualify as an Australian resident for taxation purposes under ordinary concepts as they resided overseas for a considerable period of time and was not actually living in Australia during that time.

However under the domicile and permanent place of abode test a person will be a resident of Australia if they have an Australian domicile, unless the Commissioner is satisfied that the person has established a permanent place of abode outside of Australia.

Domicile and permanent place of abode test

Domicile

Domicile is a legal concept. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home. A person retains the domicile of origin until he or she acquires domicile of choice in another country, or until he or she acquires another domicile by operation of law.

In order to show that a new domicile of choice in a country outside Australia has been adopted, a person must be able to prove an intention to make his or her home indefinitely in that country, for example, through having obtained a migration visa.

In your situation you and your spouse are members of the ADF. After performing a fixed term posting overseas you relocated permanently back to Australia. You remained residents of Australia for tax purposes while you were overseas. Your permanent home (domicile of origin) is in Australia.

As Australia is your permanent home, your child acquired at birth the same domicile of origin. As your child's domicile is in Australia they will be considered a resident of Australia from their date of birth overseas.

Permanent place of abode

Having established that a person has his or her domicile in Australia, the definition of resident requires that the person's permanent place of abode is not outside Australia.

The expression 'place of abode' refers to a person's residence, where one lives with one's family and sleeps at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives.

In its context in the resident definition a permanent place of abode does not have to be everlasting or forever. It should be contrasted with a temporary or transitory place of abode outside Australia.

Income Tax Ruling IT 2650 outlines some relevant factors that are used by the courts and tribunals in deciding such cases. The relevant factors are:

- intended and actual length of stay overseas, including the continuity of that stay

- existence of an established home overseas

- existence of a residence in Australia (while overseas), and

- family and financial ties.

IT 2650 states that as a general proposition, an overseas stay for a duration of less than two years would be considered as being of a transitory nature.

You were posted overseas for a period of less than two years. You remained an Australian resident for tax purposes and maintained your Australian assets and contacts during the posting. It is considered that a permanent place of abode for you and your child had not been established outside Australia.

Residency status of your child

The primary test for deciding Australian residency status (residence according to ordinary concepts) was not met in your child's case. However the domicile and permanent place of abode test of Australian residency were met. Your child is a resident of Australia for taxation purposes from birth.

Medicare levy - taxpayer and spouse both defence force members

Under subsection 251R(6D) of the ITAA 1936 where both the taxpayer and their spouse are prescribed persons (Defence Force members), a child of theirs may be treated as a dependant of only one spouse. Only that spouse will be liable to pay one half of the Medicare levy and the other spouse will be exempt. In these cases a 'family agreement' must be entered into as explained in Taxation Ruling TR 93/35.

MLS

For the purposes of the MLS, section 251V of the ITAA 1936 provides that subsection 251R(6D) of the ITAA 1936 does not apply. Therefore a resident Australian dependant child is considered to be a dependant of both taxpayers for MLS purposes.

Conclusion

Medicare levy

As members of the ADF you and your spouse are prescribed persons. If you are the nominated parent on the 'family agreement' you will be liable to pay one half of the Medicare levy for your child from your child's date of birth.

MLS

Your child is considered to be a dependant of both you and your spouse for MLS purposes. Your child was covered by country X private health insurance overseas, funded by the Australian government. This is not regarded as an appropriate insurance policy that provides your child with private patient hospital cover in Australia. Therefore where your family income exceeds the MLS family threshold, you will be liable for the MLS from your child's date of birth for the period of time that your child was without Australian private patient hospital cover.

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