Edited version of private ruling

Authorisation Number: 1011884909781

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Ruling

Subject: Residency

Questions and answers:

1. As a member of an eligible superannuation scheme are you a resident of Australia for income tax purposes as defined in section 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Yes.

2. Are you a resident of another country for the purposes of the double tax agreement between Australia and that country?

Yes.

3. While you are a resident of Australia, are you able to disregard your foreign exchange realisation gains and losses?

Yes.

4. Are you able to disregard the capital gains tax event C2 that occurred when you withdrew your foreign currency from your Australian bank account?

No.

5. Are you able to use an average rate to translate expenses into Australian dollars for foreign exchange events?

No.

6. When taxes are withheld from salary and wage income by a foreign entity, is foreign income tax considered paid under section 770-130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

No.

7. When taxes have been withheld from salary and wage income by a foreign entity for an income year and the tax withheld equals the tax owing as shown on the resulting notice of assessment, is foreign income tax considered paid under section 770-130 of the ITAA 1997?

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You are a citizen of Australia.

Your country of origin is not Australia.

You are an employee of the Commonwealth Government of Australia.

You are single and do not have any family in Australia.

You commenced a period leave in the 2010-11 income year.

Approximately one week after commencing leave you immigrated to another country and you are living there.

At the current time you intend to reside permanently in that country and do not have any plans to return to Australia.

Since your departure you have not returned to Australia.

You have a permanent immigrant visa and a card indicating your country of origin.

You are a member of an eligible superannuation scheme.

You were renting your residence when you were in Australia and you do not have a permanent place to live in Australia.

You have a bank account in Australia.

Since leaving you read about Australia (topics include politics, economy, sports and current affairs).

You meet people in malls and shopping centres and you meet people when you are eating in restaurants and you discuss various things about the country in which you are currently living.

Before leaving Australia you purchased a sum of foreign currency.

Initially this amount was deposited in an Australian bank account.

Subsequently, and before leaving Australia this amount was deposited in your foreign bank account.

From your foreign currency you purchased a small home, a car and you paid for your personal expenses.

You do not maintain a record of your personal expenses.

At the end of the 2010-11 income year you still held a sum of foreign currency in your foreign bank account.

Under that country's tax law, you are a resident of that country.

Taxes may be withheld from interest or wages that you may earn in that country.

For the year ended 30 June 2011 you did not receive any salary or wages from that country however, you may commence work in that country and tax will be withheld from the salary or wages that you earn.

You received some interest on your savings accounts in Australia and overseas but no tax was withheld from these amounts.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)
Income Tax Assessment Act 1936 Section 128B
Income Tax Assessment Act 1936 Section 128D
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 11-55
Income Tax Assessment Act 1997 Section 104-25
Income Tax Assessment Act 1997 Section 108-5
Income Tax Assessment Act 1997 Section 770-10
Income Tax Assessment Act 1997 Section 770-70
Income Tax Assessment Act 1997 Section 770-75
Income Tax Assessment Act 1997 Section 770-130
Income Tax Assessment Act 1997 Section 770-140
Income Tax Assessment Act 1997 Section 775-15
Income Tax Assessment Act 1997 Section 960-50
International Agreements Act 1953 Section 4
International Agreements Act 1953 Section 5

Reasons for decision

Residency

The existing definition of "resident" or "resident of Australia" contained in subsection 6(1) of the ITAA 1936, so far as it applies to individuals, provides four tests of residency:

(i)   residence according to ordinary concepts;

(ii)  the domicile test;

(iii)   the 183 days test; and

(iv)   the Commonwealth superannuation test.

In determining whether or not a natural person is a resident of Australia, the starting point is always whether the individual in question resides in Australia within the ordinary meaning of that expression. However, the satisfaction of any one test is sufficient to render an individual a resident of Australia for Australian income tax purposes.

The Commonwealth superannuation test (subparagraph 6(1)(a)(iii) of the ITAA 1936 was inserted into the Act in 1939 to include all Commonwealth public servants as residents. This was done by treating as a resident a person who contributes to an eligible superannuation scheme. The spouse or child under 16 of a person who contributes to an eligible superannuation scheme is also treated as a resident.

An additional eligible superannuation scheme was introduced on 1 July 1990 as a consequence of the passage of the Superannuation Act 1990 (SA 1990). The amendment treats Commonwealth public servants who are members of this scheme in the same way as they would have been treated had they been members of the original scheme A spouse or a child under 16 years of age of a member of the new scheme will also be treated as a resident.

To determine whether you are a resident under the Commonwealth superannuation test, for the period you are on leave and residing overseas, it is necessary to determine whether you are a member of an eligible superannuation scheme for the purposes of the SA 1990 for that period.

Rule 1.1.1 of The Schedule to the SA 1990 defines a 'member' to mean a person who is a member of an eligible superannuation scheme. Generally this would include a permanent or temporary employee of the Australian Public Service (APS). Active members of these Commonwealth government superannuation funds and their spouses are always residents of Australia for tax purposes.  

If a person is not currently employed in a Commonwealth department they are not an active member of one of these funds. An individual continues to be currently employed by an organisation while they are on leave from duties - even where they are on long-term unpaid leave or suspended from duty. An individual ceases to be currently employed when they resign, retire, or are dismissed from the organisation.  

You are a Commonwealth Government employee who is currently on leave. As you are on leave while living overseas and you have not resigned, retired or been dismissed from the organisation, you are still currently employed and an active member of an eligible superannuation scheme.

As you are a member of an eligible superannuation scheme you satisfy the Commonwealth superannuation test. Therefore, under section 6(1) of the ITAA 1936, you remain an Australian resident for income tax purposes while you are living overseas.

The double taxation agreement

In determining the assessability of your income in Australia it is necessary to consider not only the Australian income tax laws, but also any applicable double tax agreement (DTA) that exists between Australia and Country X.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one.

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 relevant Double Tax Agreement (DTA) is listed in section 5 of the Agreements Act.

The DTA is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. This Agreement operates to avoid the double taxation of income received by residents of Australia and that country.

Article 4 of the DTA examines residence and explains that a person is a resident of either that country or Australia if that person is deemed to be a resident of one of those countries for the purposes of its taxation legislation.

Where a person is found to be a resident of both that country and Australia, for the purposes of the DTA their status will be determined in accordance with the following rules:

(a) the person will be deemed to be a resident solely of the country in which they have a permanent home available to them;

(b) if they have a permanent home available to them in both Australia and that country, or if they do not have a permanent home available to them in either country, they will be deemed to be a resident solely of the country with which his personal and economic relations are the closer.

When you left Australia your intentions were to immigrate overseas with no immediate plans to return to Australia to live. You are employed by Commonwealth Government of Australia and commenced a period of leave. You no longer have a permanent home available to you in Australia and you have purchased a home overseas.

Accordingly, for the purposes of the DTA you ceased to be an Australian resident when you left Australia with the intention of immigrating overseas with no intention to return to Australia to live.

We now need to look at the DTA to determine which country has taxing rights of your income.

Assessability of income

Subsection 6-5(2) of the ITAA 1997 advises that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Subsection 6-5(3) of the ITAA 1997 advises that the assessable income of a non-resident taxpayer includes all ordinary income derived directly or indirectly from all Australian sources and other ordinary income that a provision includes on some basis other than having an Australian source.

Subsection 6-10(4) of the ITAA 1997 states that the assessable income of an Australian resident will also include statutory income from all sources, whether in or out of Australia. On the other hand subsection 6-10(5) states for a non-resident, the assessable income includes statutory income from all Australian sources.

Ordinary income generally includes three categories:

§ income from rendering personal services including employment income,

§ income from carrying on a business, and

§ income from property (such as rent), interest and dividends.

Statutory income includes net capital gains.

Interest income

Under the DTA, Article 11(1) states that interest paid to a resident of that country that arises from Australian sources may be taxed in the foreign country. Article 11(2) of the DTA states that the interest paid to a resident of that foreign country may also be taxed in Australia, but the tax charged shall not exceed 15 per cent of the gross amount of the interest. This 15% is known as withholding tax that is normally withheld by financial institutions.

In your case you remain a resident of Australia under the Commonwealth superannuation test. For this reason you are not required to have withholding tax taken from your interest income sourced in Australia. You are required to continue to lodge income tax returns in Australia and the tax payable on your interest income will be limited to a maximum of 15% in accordance with the DTA.

You can obtain information on lodgement of a tax return from overseas on our website at www.ato.gov.au.

Salary and wage income

In accordance with the DTA your salary and wage income earned as a Commonwealth Government of Australia employee before you left Australia will be taxable only in Australia. Similarly, the interest you earned from your bank accounts before you left Australia will be taxable only in Australia.

Foreign currency

While you were still residing in Australia you transferred your foreign currency from your Australian bank account to your foreign bank account and a foreign exchange (forex) realisation event occurred. However, under the forex exclusions because the dominant purpose of the event was private and domestic as you were providing support for yourself to live overseas, the forex event will be disregarded.

However, capital gains tax (CGT) event C2 occurred when you withdrew the foreign currency and transferred the amount to your foreign bank account.

Capital gains tax event C2

Capital gains tax is the income tax you pay on any net capital gain you make and include in your annual income. CGT events are the different types of transactions that may result in a capital gain or capital loss.

CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being redeemed, cancelled, released, discharged, satisfied, abandoned, surrendered or forfeited or by the asset expiring. The timing of CGT event C2 is when any contract that results in the asset ending was entered into or, if there is no contract, when the asset ends.

A capital gain arises if the capital proceeds from the ending are more than the asset's cost base. A capital loss arises if the capital proceeds from the ending are less than the asset's reduced cost base.

Gains or losses under the capital gains tax provisions

Under section 108-5 of the ITAA 1997 foreign currency is a CGT asset. Bank accounts denominated in a foreign currency are not foreign currency but rather a chose in action, or more specifically a debt denominated in a foreign currency.

The depositing of foreign currency into a bank account results in the acquisition of a debt by the depositor, the debt being a chose in action and a CGT asset. The chose in action is the ability to require payment of the account balance, or part of it, on demand (Joachimson v. Swiss Bank Corporation [1921] 3 KB 110 at 127).

A bank account is a single asset, the one debt and chose in action. That is, a single debt existing between the customer and the banker in their respective capacities as creditor and debtor (Foley v. Hill [1860] All ER 16).

As the bank account is one asset, each deposit adds to its cost base and reduced cost base and each withdrawal constitutes a part ending or part satisfaction of the debt asset. Each withdrawal will constitute CGT event C2 happening to the relevant 'part' of the asset (the amount withdrawn).

Currency conversion

Subdivision 960-C of the ITAA 1997 sets out the basic rules for converting foreign currency into Australian currency. The table in subsection 960-50(6) of the ITAA 1997 outlines the exchange rate at which amounts in respect of particular transactions are to be translated.

Item 6 of the table in subsection 960-50(6) of the ITAA 1997 specifies that an amount of ordinary income is to be translated at the exchange rate applicable at the time of receipt if the amount is received at or before the time when it is derived. In any other case, the ordinary income amount is to be translated to Australian currency at the exchange rate applicable when it is derived. Ordinary income includes salary and wages, income from a rental property and interest from investment income.

Subsection 960-50(7) indicates further choices when it comes to converting foreign currency and points out that Regulation 960-50.01 of the Income Tax Assessment Regulations 1997 (Regulations) states in Item 12 that as a alternative to the result mentioned in Item 6 of the table in subsection 960-50(6) of the ITAA 1997, a foreign currency amount may be translated into Australian currency using any of the rules set out in Schedule 2 to the Regulations.

The rules set out in Schedule 2 to the Regulations state that foreign currency amounts can be translated using average rates, daily rates or rates consistent with the rates used in the preparation of the an audited financial report.

For average rates, 1.3 of Schedule 2 to the Regulations states that generally, a taxpayer can translate an amount into Australian currency using an exchange rate that is an average of the exchange rates applicable during a period (which may be less than, but not exceeding, 12 months) chosen by the taxpayer. However, an average rate cannot be used unless the average rate is a reasonable approximation of the exchange rates that would otherwise be applicable if the taxpayer had used spot rates at the specific translation times provided for by subsection 960-50(6) of the ITAA 1997.

However, these regulations apply to ordinary income only and as we are dealing with a CGT event, we need to apply the laws that relate to statutory income.

If a transaction or event involving an amount of money or the market value of other property is relevant for CGT purposes and the money or market value is expressed in a foreign currency, the amount or value is to be converted into the equivalent amount of Australian currency at the time of the transaction or event (section 960-50, table item 5). This requirement means conversion at the time of each transaction or event.

As mentioned above, when you transferred your foreign currency from your Australian bank account to your foreign bank account a CGT event C2 occurred. Accordingly, you will need to determine if you made a capital gain or a capital loss at this time using the exchange rate applicable on that date.

Your cost base will be the amount you paid to acquire the foreign currency and your capital proceeds will be the Australian dollar value of the foreign currency on the date of transfer.

After leaving Australia and establishing a home overseas you became a resident of that country for the purposes of the DTA. Clause 21 of the DTA excludes any further transactions occurring on your foreign bank account from being assessable in Australia and therefore you will not be required to translate any amounts into Australian dollars while you remain a resident of that country for the purposes of the DTA.

Entitlement to foreign income tax offset (FITO)

A FITO is a non-refundable tax offset, and will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid. The main purpose of the FITO is to protect you from double taxation that may arise where you pay foreign tax on income that is also taxable in Australia. The Division does this by allowing you to claim a FITO where you have paid foreign tax on amounts included in your Australian assessable income.

The offset is allowed for the income year in which the foreign tax is paid. Normally, the tax must have been paid by the person claiming the offset, though there are exceptions in certain situations, such as where the tax has been deducted at source, or otherwise paid on your behalf.

The type of foreign tax that is eligible for the offset is, broadly, foreign income tax that is substantially equivalent to Australian income tax.

The offset is non-refundable, with the result that if it exceeds the amount of tax otherwise payable for the year, the excess is lost. The excess cannot be transferred to another taxpayer and the excess cannot be carried forward to a later income year.

Foreign income tax must be paid

To count towards a tax offset, you must have actually paid or be deemed to have paid the foreign income tax. It is not sufficient that the tax is due and payable and further, if you are entitled to a refund of the foreign income tax the tax is not considered to have been paid.

You are treated as having paid foreign income tax on all or part of your assessable income where the tax has been paid in respect of that income by someone else on your behalf under an arrangement or under the law relating to that tax.

This tax-paid deeming rule ensures that the right taxpayer obtains the tax offset. It applies in situations where the foreign income tax has actually been paid by someone else in a representative capacity for the taxpayer, with the latter bearing the economic burden of the tax. Specifically, it applies where foreign income tax has been paid by:

· deduction or withholding (such as withholding tax withheld by a bank from interest income)

· a trust in which the taxpayer is a beneficiary

· a partnership in which the taxpayer is a partner, or

· the taxpayer's spouse.

If you are earning salary and wage income from which your employer is withholding an amount of tax, such tax is not paid until you have lodged your income tax return and received your notice of assessment. Receipt of your notice of assessment finalises your tax liability for the year by either refunding any excess tax paid or asking you to pay any amount owing. Any refund included in your notice of assessment will reduce your FITO entitlement and any additional payment required will increase your FITO entitlement.

As you were a resident of Australia for the 2010-11 income year, you will need to lodge an income tax return in Australia for that year. While you continue to be a resident of Australia due to being a member of an eligible superannuation scheme and on a period of leave and not having resigned, retired or being dismissed from the organisation, you remain eligible to receive the tax free threshold.

As you did not earn any assessable foreign source income and you have not paid any foreign tax during the 2010-11 income year, you are not eligible for a FITO.

Summary

Residency

You continue to be a resident of Australia under the ITAA 1936 as you are a member of an eligible superannuation scheme. Since you established a permanent home overseas, you became a resident of a foreign country for the purposes of the DTA.

Foreign exchange gains and losses

As the dominant purpose of your foreign currency transaction while still a resident of Australia was to support yourself and provide funds so you could buy yourself a home, a car and personal items while residing overseas, the forex realisation gain or loss made at the time of transferring the funds to the foreign bank account was private and domestic in nature. Therefore, any resulting forex realisation gain or loss on the withdrawal of the funds is not assessable under section 775-15 of the ITAA 1997.

As you are a resident of another country for the purposes of the DTA you are not required to translate your foreign income into Australian dollars for taxation purposes.

CGT event C2

When you transferred your foreign currency from your Australian bank account to your foreign bank account a CGT event C2 occurred. You will need to determine if you made a capital gain or a capital loss at this time using the exchange rate applicable on that date.

Your cost base will be the amount you paid to acquire the foreign currency and your capital proceeds will be the Australian dollar value of the foreign currency on the date of transfer.

FITO
As you did not earn any assessable foreign source income, nor did pay any foreign tax during the 2010-11 income year you are not eligible for a FITO.

Further issues for you to consider

If and when you decide to resign or retire, or you are dismissed from your position in the Commonwealth Government of Australia, and you continue to live outside Australia, you will become a non-resident of Australia for taxation purposes. It will be necessary for you to advise your financial institutions in Australia of your overseas address; they will then be required to withhold tax from any payments they make to you.

If you receive any payment for ceasing your employment in Australia, this will be Australian sourced income.

If you become eligible to receive a FITO, the offset is based on the total foreign income tax paid (section 770-70 of the ITAA 1997), but is limited to the amount of Australian income tax that would have been payable on the relevant income (section 770-75 of the ITAA 1997).

To determine the amount of the tax offset in any particular year, you must first calculate the total foreign income tax paid on amounts included in your assessable income for the year.

If this amount is not more than $1,000, you can simply claim the amount of the foreign income tax as the tax offset. In this situation, the amount of Australian tax on the relevant income is irrelevant, and therefore there is no need to work out the offset "cap".

If, on the other hand, the amount exceeds $1,000, you have two options:

s The first option is to claim only $1,000 as the offset. This would mean that the excess foreign income tax would effectively be wasted, but it would eliminate the need to calculate the offset cap.

s The second option applies where you wish to claim an offset greater than $1,000. In this case, you must calculate the offset cap. This will enable you to claim an offset up to the amount of that cap. (If it turns out that the cap is less than $1,000, you can simply claim the amount of foreign income tax paid, up to $1,000, as the offset.)

Calculation of offset cap

In general terms, the offset cap is calculated as the amount of Australian income tax that would be attributable to the income that has attracted the foreign income tax (the double-taxed amount). In detail, the steps in calculating the cap are as follows:

Step 1: Calculate the amount of (Australian) income tax payable for the income year Of course, if this amount is nil (for example because there is a net loss), the offset limit calculated under this method must necessarily also be nil, and no further calculation is necessary.

Step 2: Calculate the amount of tax that would have been payable if the following assumptions applied:

(a) the assessable income excluded:

(i) the assessable amounts in respect of which eligible foreign income tax was paid, and

(ii) any other ordinary or statutory income from a non-Australian source, irrespective of whether foreign tax has been paid on that income, and

(b) you were not entitled to any deductions for:

(i) debt deductions attributable to your overseas permanent establishment

(ii) any deductions (other than debt deductions) that reasonably relate to the amounts of income excluded under (a) above, or

(iii) any "convertible foreign loss" deducted by you in the income year.

Step 3: Calculate the offset limit by subtracting the amount calculated under Step 2 from the amount calculated under Step 1.

This method is designed to ensure that the tax attributable to the foreign income is calculated as if that income were the top slice of income, and therefore taxed at your highest marginal rate.

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