Edited version of your private ruling

Authorisation Number: 1012561420162

Ruling

Subject: Assessability of income

Questions and answers

Will the salary you receive from the company be assessable in Australia during the period you are in Country X?

Yes.

This ruling applies for the following periods

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

Year ending 30 June 2017

The scheme commences on

1 July 2013

Relevant facts and circumstances

You and your spouse are directors, shareholders and employees of the company.

The company is an Australian incorporated company.

You and your spouse are the trustees of a self managed superannuation fund (SMSF).

The company pays you a salary in your capacity as an employee.

The company does not pay you any remuneration in your capacity as a director.

Your business is totally electronic with sales being generated through your website and correspondence being undertaken by email.

You and your spouse do not require an office and work from home.

The nature of your business allows you to work from anywhere in the world.

The majority of your clients are Australian.

Your business does not have any other employees.

For health and family reasons, you and your spouse intend to live in country X for a period of approximately two years; however, this may be extended by another year. You will then return to Australia to live.

You will carry on your business activities in country X through the company in the same fashion as you did in Australia. For example, you do not anticipate expanding your business or moving in a different direction.

You consider it unlikely that you will make any return visits to Australia during the period you are in country X.

You and your spouse were born in country X and are citizens of country X.

You and your spouse moved to Australia and are permanent residents of Australia.

You are unable to have dual citizenship under country X law and you do not want to relinquish your country X citizenship.

You and your spouse have parents, brothers and sisters who live in country X.

You and your spouse have no children and do not have any relatives in Australia.

You and your spouse have personal assets in Australia which include the house in which you live, household effects/furniture and bank accounts.

Your Australian SMSF owns a rental property, shares and bank accounts.

You and your spouse do not have a mortgage or any other loans.

You and your spouse have Australian credit cards.

You will rent out your Australian home through a rental agent while you are in country X. You will rent the house on a furnished basis if possible.

You wish to continue making contributions to your SMSF while you are overseas.

You and your spouse have assets in country X which include a house, household effects/furniture and bank accounts with small balances.

You and your spouse will live in the house you own and carry out your business activities from the house while you are in country X.

Since purchasing the house, you returned to country X for a period of time to renovate the house and furnish it. The house is currently rented.

You have never been employed by the Australian Commonwealth Government.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

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 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' and 'permanent place of abode' test;

· the 183 day test; and

· the Commonwealth superannuation fund test.

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual for taxation purposes. If residency is established under the resides test, the remaining three tests do not need to be considered. However, if residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test

The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes it's ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936.

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3^rd edition, The Macquarie Library Pty Ltd, NSW, 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'.

In considering the definition of 'reside', the courts have noted the term 'reside' should be given a wide meaning for the purposes of the income tax legislation.

The question of whether an individual 'resides' in a particular country is a question of fact and degree and not of law. In deciding this question, the courts have consistently referred to and taken into account the following factors as being relevant:

· physical presence in Australia;

· nationality;

· history of residence and movements;

· habits and 'mode of life';

· frequency, regularity and duration of visits to Australia;

· purpose of visits to or absences from Australia;

· family and business ties with Australia compared to the foreign country concerned; and

· maintenance of a place of abode.

The weight given to each factor varies with individual circumstances and no single factor is necessarily decisive.

To determine whether or not you are residing in Australia for taxation purposes, it is necessary for us to examine each of these factors in the context of your circumstances.

Physical presence in Australia

An intention to live or work overseas for a fixed period of time before returning to Australia is more indicative of an individual who is still residing in Australia than someone who intends to live or work overseas for an indefinite or unspecified period of time.

A person does not necessarily cease to be a resident because he or she is physically absent from Australia. In Joachim v Federal Commissioner of Taxation 2002 ATC 2088, the Tribunal stated (at 2090):

Physical presence and intention will coincide for most of the time but few people are always at home. Once a person has established a home in a particular place, even involuntary, a person does not necessarily cease to be resident there because he or she is physically absent. The test is, whether the person has retained a continuity of association with the place, together with an intention to return to that place and an attitude that the place remains home. [Emphasis added]

In Iyengar v. Federal Commissioner of Taxation 2011 ATC 10-222, (2011) AATA, the Tribunal stated (at 62):

Physical presence in a country for some period during a particular year of income is usually considered by the courts as necessary in order that a person should be resident in that country during that particular income year. However, there have been exceptions to this: Rogers v Inland Revenue Commissioners (1879) 1 TC 225 and Slater v Commissioner of Taxation (NZ) (1949) 9 ATD 1.

In your case, you intend to live in country X for a period of approximately two years with the possibility of another year before returning to Australia to live. You consider it unlikely that you will make any return visits to Australia during this period.

Nationality

You were born in country X and are a citizen of country X. You are also a permanent resident of Australia.

History of residence and movements

You moved to Australia and have lived here for some years. You recently spent time in the Country X renovating your house.

Habits and 'mode of life'

For health and family reasons, you intend to return to live in country X for a period of approximately two years with a possibility of another year. You will live in the house you own in country X and undertake your business activities in the same fashion as you are doing in Australia. You will also continue to administer your SMSF and the company you are directors and shareholders of.

Frequency, regularity and duration of visits to Australia

As mentioned above, you consider it unlikely that you will make any return visits to Australia during the period you are in country X.

Purpose of visits to and absence from Australia

The purpose of your absence from Australia will be to live and work in country X.

Family and business ties

Family

You will be living with your spouse in Country X. Your extended families also live in country X.

Business or economic

You are a director and shareholder of an Australian incorporated company and you run your business activities through the company. You are also a trustee of your Australian SMSF.

You will continue to derive business income from Australian clients and also derive rental income from your Australian residence while you are overseas.

You wish to continue making contributions to your SMSF while you are overseas.

You have stronger business and economic ties to Australia than Country X.

Assets

Your assets in Australia include your SMSF, the house in which you live, household effects/furniture and bank accounts.

Your assets in country X include a house, household effects/furniture and bank accounts with small balances.

You have stronger financial ties to Australia than Country X.

Maintenance of a place of abode in Australia

You have established a residence or place of abode in Australia which will be rented out while you are overseas. However, you intend to return to live in this dwelling when you return to Australia.

Summary

In your case, although you will be physically absent from Australia for up to three years, there are several factors that indicate that you will not cease to be a resident of Australia. Specifically:

· you are a permanent resident of Australia and have a stated intention of returning to Australia to live within approximately three years;

· you have established a home in Australia that you intend to return to; and

· you have strong business and financial ties to Australia by way of the company, your business activities, personal assets and SMSF.

You have established a home in a place in Australia and you will retain a continuity of association with that place while you are overseas together with an intention to return to that place.

Therefore, you will be residing in Australia according to the ordinary meaning of the word and will be a resident under the 'resides' test of residency for the income tax years.

As you are a resident under this test, it is not necessary to determine whether you meet the requirements of any of the other tests of residency.

Assessability of income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

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 agreement with country X is listed in section 5 of the Agreements Act.

The agreement between Australia and country X operates to avoid the double taxation of income received by residents of Australia and country X.

An article of the agreement states that salaries, wages and other similar remuneration derived by a resident of one of the countries in respect of an employment shall be taxable only in that country unless the employment is exercised in the other country. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in the other country.

In your case, you will be living and working in country X for a period of at least two years and will remain an Australian resident for taxation purposes. You will be deriving a salary from an employment exercised in country X so your income may be taxed in country X.

The term 'may be taxed' in the context of the country X agreement will not prevent Australia from taxing the salary you derive from the company. As you will remain an Australian resident, your income will continue to be taxed in Australia; however, country X will also have the right to tax your employment income. Enquiries should be made with the income tax authorities in country X in this regard.

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