Edited version of private ruling

Authorisation Number: 1011574301566

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Ruling

Subject: Residency status and Australian director's fees

1. Are you a resident of Australia for taxation purposes?

No.

2. Is the income derived from your employment as a director of several Australian private entities assessable in Australia?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2009

Year ending 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commences on:

1 July 2008

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian citizen.

Your country of origin is Australia.

You departed Australia.

You are fulltime employed by a Country B corporation.

The above Country B company is a wholly-owned subsidiary of an Australian private company.

You are a director and shareholder of the Australian private company.

You are a shareholder and director of several Australian private entities and derive income from these entities.

You travel outside Country B for greater than 90 days per year for the business of these Australian entities (including trips to Australia).

However, you spend less than 180 days outside of Country B.

You intend to reside overseas for the next several years.

You intend to return to Australia upon a permanent basis sometime after 2013.

You and your spouse are renting an apartment in a city in Country B.

You have bank accounts in Country B.

You and your spouse have social friends in Country B.

You and your spouse have never been employees of the Commonwealth of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Subsection 995-1

International Tax Agreements Act 1953

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

(1) Residency status:

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident as a person who is a resident of Australia for the purpose 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. These tests are:

· The resides test

· The domicile test

· The 183 day test

· The superannuation test.

The first two tests that are relevant to your circumstance depend on whether or not you could be considered to be residing permanently or for a considerable period of time in the country B, such that it is your settled or usual place of abode.

You left Australia to take up a position with a Country B corporation. You and your spouse are renting an apartment in a city in Country B. You and your spouse have social friends in Country B. You travel outside Country B for greater than 90 days per year. However, you spend less than 180 days outside Country B. You have bank accounts in Country B. You intend to reside overseas for the next several years. You intend to return to Australia upon a permanent basis sometime after 2013.

Therefore, you would be considered to have established a permanent or long-term abode outside of Australia for an indefinite period.

In view of the above, it has been concluded that you will not be a resident of Australia for taxation purposes.

(2) Assessability of director fees for service performed in Australia

Subsection 6-5(3) of the ITAA 1997 provides that ordinary income derived by a foreign resident directly or indirectly from Australian sources, is assessable in Australia.

Salary and wages are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties (Commissioner of Taxation (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and Federal Commissioner of Taxation v. French (1957) 98 CLR 398; (1957) 11 ATD 288; (1957) 7 AITR 76). It has also been recognised that other factors such as the place of securing the contract of employment and the payment of salary and wages can also be significant in some cases but in ordinary situations where the right to remuneration depends on the performance of services, the place of performance will be paramount. The courts also confirmed that it is appropriate to apportion income earned to reflect the source of income.

In your case, you carried out some of the work in Australia. Thus, employment income earned while carrying out duties in Australia is considered to be sourced in Australia.

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Agreements Act 1953 (Agreements Act).

The Agreements Act contains the tax treaty between Australia and Country B (the Country B Convention). The Country B Convention operates to avoid the double taxation of income received by Australian and Country B residents.

The Country B Convention provides that salary and wages derived by a Country B resident from employment exercised or from services performed in Australia as a director of a company is taxable in Australia.

The Country B Convention provides that the income will only be taxed in Country B if:

· the taxpayer is present in Australia for a period or periods not exceeding 183 days in the Australian income year

· the remuneration is not paid by, or on behalf of, an employer or company who is a resident of Australia, and

· the remuneration is not deductible in determining taxable profits of a permanent establishment, a fixed base or a trade or business which the employer or company has in Australia.

Although you are not present in Australia for more than 183 days in the Australian income year, your employer is an Australian resident for tax purposes, and your remuneration is deductible in determining the taxable profit of an Australian company. Therefore, the conditions for the exception in the Country B Convention are not met.

Accordingly, your remuneration from services performed in Australia as a director of a company is assessable in Australia under subsection 6-5(3) of the ITAA 1997.

Note

Dividend and interest income

If you invest in your own right and provide your overseas postal address and/or overseas payment location to the Australian entity that is paying interest or dividend income to you, the Australian entity should automatically deduct the correct non-resident interest and dividend withholding tax.

If you buy (or hold) shares in an Australian company and you advise the Australian company that the dividend must be paid to a location in Country B or that your postal address is in Country B, the Australian company should impose non-resident dividend withholding tax.

As you are a resident of Country B for the purposes of Country B tax and you are not a resident of Australia for the purposes of Australian tax, you should be subject to non-resident dividend withholding tax at the rate of 15% (if the dividend is not franked and is not declared to be conduit foreign income). Lower rates apply if you own 10% or more of the Australian company. No non-resident dividend withholding tax is payable to the extent that the dividend is franked or is declared to be conduit foreign income. The Australian company will state how much of the dividend is franked or is conduit foreign income and the Australian company should withhold the correct amount from the balance of the dividend.

Capital gains on shares

As a general rule, if you own less than 10% of the Australian company, you will not be liable to capital gains tax (CGT) on a CGT event happening to your shares (for example when you sell the shares).

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