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This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

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Edited version of your private ruling

Authorisation Number: 1012418622769

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Ruling

Subject: Your residency status and assessability of income earned whilst overseas

Question 1

Were you an Australian resident for taxation purposes for the relevant financial year?

Answer:

Yes.

Question 2

Is your foreign employment income assessable in Australia?

Answer:

Yes.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commenced on:

1 July 2009

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 were born in Australia and you are an Australian citizen.

You travelled to country X during a gap year on a working holiday visa in 200X and returned to Australia in 20YY.

You held a 24 month working holiday visa.

You held numerous jobs in and worked for the majority of the year in the same region of Country X.

You were living in share houses and travelled between seasons.

You earned taxable income and paid tax in Country X.

You were living with your family in Australia before you left to travel to Country X.

Your intention was always to return to Australia to commence full time university studies.

You commenced full time study on your return to Australia and you are now living with friends.

You have never worked for the Commonwealth Government and have therefore never been eligible to contribute to a Commonwealth Government superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-70

Income Tax Assessment Act 1997 Section 770-75

International Tax Agreements Act 1953 Schedule Sch3

International Tax Agreements Act 1953 Sch3-Art23

International Tax Agreements Act 1953 Sch3-Art15

International Tax Agreements Act 1953 Sch3-Art4

Reasons for decision

Residency

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 contains four tests which will help us ascertain whether you were a resident of Australia for income tax purposes for the period you were living and working in East Timor. These tests are:

You need only fall within one of these categories to be a resident of Australia and must fall outside all four to be a non-resident. The main test for deciding your residency status is whether you reside in Australia according to the ordinary meaning of the word resides. 

The residence according to ordinary concepts test
The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd edition, 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'.

As you were living in country X for a period of the 200X and 200Y financial years you were not residing in Australia and were therefore not a resident of Australia under this test.

The domicile/permanent place of abode test

If you have your domicile in Australia you will be an Australian resident unless the Commissioner is satisfied you have a permanent place of abode outside of Australia.

There are essentially 3 types of domicile that an individual can have:

Basically, your domicile of origin is where you were born.

In order to show that you have chosen a new domicile of choice in a country outside Australia, you must be able prove an intention to make your home indefinitely in that country, for example, by applying for permanent residency in a new country.

In relation to domicile of dependency, such a domicile will normally only exist in relation to minors or individuals who are of unsound mind.

You were born in Australia and therefore your domicile of origin is Australia. When you left Australia to work in country X you did not intend to take up permanent residency there but always intended to return to Australia to commence full time study.

You therefore maintained your Australian domicile. We will now examine the second part of this test: Did you establish a permanent place of abode outside Australia?

The expression 'place of abode' refers to your residence, where you live with your family and sleep at night. Basically, your place of abode is your dwelling place or the physical surroundings where you live.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest of your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere.

Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia provides guidelines for determining whether individuals who leave Australia temporarily to live overseas, for example, on temporary overseas work assignments or on overseas study leave, cease to be Australian residents for income tax purposes during their overseas stay.

IT 2650 gives us the following factors that need to be taken into account:

In addition the ruling explains at paragraph 25 that where you leave Australia for an unspecified or a substantial period and establish a home in another country, that home will represent your permanent place of abode outside Australia, subject, however to consideration of the other factors listed above.

The ruling advises that as a broad rule of thumb, a period of about two years or more would generally be regarded by the Commissioner as a substantial period for the purposes of a taxpayer's stay in another country.

When we apply these guides to your circumstances:

- You were in country X for just over 12 months.

- You always intended to return to Australia to commence full time studies at university.

- You did not establish a home outside Australia; you were living in share houses at the various locations you secured employment.

- You were living with your family before you left Australia.

- You went to country X with a 24 month working visa and stayed for just over 12 months.

- Although you do not have any substantial assets of your own, your family are in Australia and you are an Australian citizen.

Taking all these factors into consideration your durability of association with Australia is stronger than that with country X. You did not establish a permanent place of abode in country X and remained a resident of Australia for income tax purposes under this test.

Your residency status

As you remained a resident of Australia under the domicile test of residency outlined in subsection 6(1) of the ITAA 1936 there is no need to examine the remaining tests.

Assessable income for residents of Australia

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether from within or outside of Australia. It follows that the income you earned whilst an Australian resident working in country X is assessable in Australia.

In determining your liability to pay tax in Australia we not only have to consider the domestic income tax laws but also the double tax agreement between Australia and country X.

This agreement with country X (the country X agreement) ensures that income received by residents of Australia or country X can avoid paying tax twice on the same income earned in either country.

One article of the country X agreement examines residence for the purposes of determining taxation rights of income and states that a person is a resident of a Contracting State if that person is a resident of that State for the purposes of its tax. As you have paid tax in country X you were accepted by the country X tax authorities as a resident of country X for tax purposes and you were a resident of country X under the country X agreement.

In accordance with another article of the country X agreement, salaries, wages and other similar remuneration derived by an individual who is a resident of Country X in respect of employment is taxable only in country X unless the employment is exercised in another Contracting State; in your case, Australia.

Foreign income tax offset

A further article of the country X agreement explains that a credit for any tax paid in country X will be allowed against Australian tax paid on income from country X.

A foreign income tax offset (FITO) is a non-refundable tax offset, and will reduce the Australian tax that is payable on the foreign income which has already been subjected to foreign income tax. The offset will be equal to the amount of foreign income tax paid you have paid.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As your income earned in country X is assessable to you in Australia, the tax you paid on this income is used to calculate your allowable foreign income tax offset in Australia.  

The offset is based on the total foreign income tax paid, however, it is limited to the total amount of Australian income tax that would have been payable on the relevant income. If claiming an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).

When claiming a FITO of more than $1,000 you need to calculate your foreign income tax offset limit. To make this calculation you need to work out the income tax payable by you (including Medicare) for the relevant financial year, disregarding any other tax offsets you may be entitled to. To make this calculation you will need to include any deductions related to your income to which you are entitled.

For further information and assistance, please refer to the Guide to foreign income tax offset rules available on our website www.ato.gov.au.

You can only claim an offset up to the amount of your calculated cap. Any excess offset cannot be carried forward to a later income year.

Differences between the Australian and country X tax systems and years lead to you paying foreign income tax in a different income year to that in which you include the related income in your Australian assessable income.

In your situation, only part of your country X income on which foreign tax has been paid is included in your assessable income on your relevant Australian tax return. Only that proportion of the foreign income tax paid which relates to the proportion of foreign income included as assessable income is available as a tax offset for the relevant financial year.

Therefore to determine the amount of the tax offset in a year, you must first calculate the total foreign income tax paid on amounts included in your Australian assessable income for that year. Foreign income tax is not considered to have been paid to the extent that it is refundable.

Where you pay foreign income tax after the year in which the related income has been included in your assessable income, you may amend your assessment for that year to claim the offset.

Conclusion

The income from your employment derived in the period you were in country X is included as assessable income on your relevant Australian tax return. However as you have only paid the associated tax for a few months, only that portion of tax can be included when calculating your allowable foreign income tax offset.

You can request an amendment to your subsequent assessment to include the remaining overseas income and associated FITO.

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