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This edited version has been archived due to the length of time since original publication.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.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of your written advice

Authorisation Number: 1013125261877

Date of advice: 9 December 2016

Ruling

Subject: Resident of Australia, Assessable income

Question 1

Is Z a resident of Australia for income tax purposes pursuant to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the income year ended 30 June 20XX?

Answer

Yes.

Question 2

Is Z assessable on payments from M Pty Ltd, pursuant to section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) for the income year ended 30 June 20XX?

Answer

Yes.

This ruling applies for the following period:

The income year ended 30 June 20XX (20XX income year)

The scheme commenced on:

The scheme has commenced.

Relevant facts and circumstances

Personal details

Z was born in Australia.

Z is an Australian citizen who travels on an Australian passport.

Family ties and relationships

Z's parents have lived in Australia since prior to the 2001 income year. Z's relationship with the parents is strained; however Z continues to visit them.

A sibling of Z lives in Australia, near Z's parents. Z has kept in limited contact with this sibling.

Z has a sibling who lives in Country B.

Z was married. The former spouse lives in Australia. Z has been divorced for many years and has had almost no contact with the former spouse.

Z has one child, who lives in Australia and is close to the former spouse. Z has been estranged from this child for many years.

Z has been in a de facto relationship with X for many years. X has X children from a prior marriage, being E and R.

X is a Country W citizen who previously lived and worked in Country W and Country B. X's sibling and the sibling's family live in Country B. X's parent lives in Country W. X's child, R, was born in Country B.

History of travel and living arrangements

In 20YY Z left Australia to live in Country B. Z did this because Z took up an appointment with J Limited in Country B at the time. At the same time, Z was appointed a director of K Corporation and a director of L Ltd.

In 20YY, Z became a Country B tax resident which allowed Z to work and live in Country B.

In 20ZZ Z resigned from J Limited, K Corporation and L Ltd and returned to Australia.

In 20XY, Z and X and the children of X left Australia to live in Country B although this was uncertain until the children of X had been accepted to attend school in Country B.

In 20XY, following acceptance of the children of X as students by the school, Z returned to Australia for a Board meeting.

The taxing authority of Country B issued to Z a residency document for the calendar year 20YZ and the following years.

Z has travelled continually between Country B and Australia since the 20YZ income year.

Australian accommodation

In 20XZ Z and X purchased a property in the City as tenants in common.

Z stayed at the property when Z was in the City during the 20XX income year.

Z's travel to and from Australia in the year ended 30 June 20XX

Details of Z's travel movements to and from Australia during the year ended 30 June 20XX as compiled from Z's travel diary were provided.

For more than 183 days, that is, the majority of the 20XX income year Z lived in Country B at the home owned by X. Z returned to Australia when required to attend meetings for P Limited.

With regard to the visit to Australia in 20WW to attend interviews Z stayed in a hotel. Z stayed in hotels during the visits in 20WW and 20XX for the purpose of attending P Ltd Board meetings. For the visit to the P Ltd operations in 20XX Z also stayed in a hotel.

At all other times Z stayed in the City at the the City home owned with X.

During the income year ended 30 June 20XX X's two children, who were students at university, lived at the City home.

Z ceased living in Country B at the end of June 20XX and returned to live permanently in Australia at the City home.

…

….

Other personal and economic relations with Australia

O Ltd XX,XXX X,XXX

P Ltd XXX,XXX XX,XXX

Personal and economic relations with Country B

Country B accommodation

In addition:

M Pty Ltd

In addition you provided the following:

Further information was provided:

…

Other work

N Ltd was established as a private company in Country B in 20XY. Z and X are the sole directors and each holds 50% of the issued capital of the company. During the 20XX income year:

In 20XX Z was approached in Country B by a representative of a Country B investor in G Ltd to become a director of G Ltd. Z accepted the role as a director of G Ltd. All G Ltd Board meetings were held electronically and by telephone conferences.

Z commenced as a director of P Ltd in 20WW. Z continued in this role in 20XX. P Ltd paid Z's airfares to travel from Country B to Australia to attend Board meetings.

Income from directorships of companies in the year ended 30 June 20XX

Income

source

Amount

Comments

Director of P Ltd

$p with withholding tax of $q and reportable fringe benefits of $r

Z returned to Australia a number of times to attend Board and Audit Committee meetings of P Ltd.

Director of G Ltd

$s

Z was appointed in 20XX to the Board of a Country H company G Ltd. Z did not return to Australia for G Ltd Board Meetings. All board meetings were held electronically or by telephone conference to Country H while Z was in Country B. Z met the Director in Country B on one occasion. Z performed the G Ltd Director's duties from Country B.

Relevant legislative provisions

Income Tax Assessment Act 1936

Subsection 6(1)

Income Tax Assessment Act 1997

Section 6-5

Section 995-1

Country B tax treaty

Reasons for decision

Question 1

Summary

In order to determine whether Z was a resident of Australia during the income year ended 30 June 20XX the examination of the facts began with consideration of Z's presence in Australia. Z was present in Australia at the beginning of the income year but left Australia for Country B in 20WW. Subsequently, Z returned to Australia more than 5 times during the income year spending more than 160 days in Australia and was present in Australia in every month of the income year. Z visited the City more than 5 times and stayed for less than 150 days in the home Z and X, Z's common law spouse, owned in the City. The longest stay in the City home by Z was a period of 54 days. During the year ended 30 June 20XX the City home was also occupied by X and the children of X.

X was in Australia for more than 225 days during the 20XX income year of which 220 days were spent at the City home.

Z was in Australia for more than155 days and spent less than 150 days at the City home.

A comparison of Z's travel diary with X's travel movements to and from Australia shows that Z and X were in Australia simultaneously for more than 140 days of which Z spent 130 days at the City home.

The statements “Z has a close business and personal relationship with the owner of M Pty Ltd, Q”, “Z met with Q on numerous occasions during days spent in Australia in the 20XX income year” and “Z is and has been a trusted business advisor and confidant of the Director of M Pty Ltd for over 25 years” evidence a strong business and personal connection to Australia.

In addition there were other connections to Australia.

In the 20XX income year Z was a director of P Ltd and came to Australia on a regular basis to attend board meetings of P Ltd.

Z also had consultancies with M Pty Ltd which represented a commercial connection to Australia.

Throughout the income year ended 30 June 20XX Z had a bank account in Australia; held an Australian Medicare card and had Private Health cover in Australia.

Z had an Australian driver's licence in the income year ended 30 June 20XX. Z owned a motor vehicle in Australia that had been purchased in 20ZZ and it was garaged at the home in The City that he owned with X, the common law spouse.

Consideration was given to all the following factors that existed in the 20XX income year:

It is concluded that Z resided in Australia according to ordinary concepts in the income year ended 30 June 20XX.

Therefore, Z is a resident of Australia in terms of subsection 6(1) of the ITAA 1936 for the income year ended 30 June 20XX.

Detailed reasoning

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines Australian resident to mean “a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936”.

In turn subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936), relevantly reads:

resident or a resident of Australia means:

In order to answer the question posed it is necessary to determine first whether Z “resides in Australia” within the ordinary concept or meaning of that term.

This will begin with consideration of Z's actual presence in Australia during the 20XX income year.

There is detailed information in the form of Z's travel diary which shows Z's travel movements to and from Australia.

The travel diary shows that Z was present in Australia at the beginning of the 20XX income year.

Subsequently, Z came to Australia on more than 5 occasions during the 20XX income year, for periods ranging from 2 days to 54 days. The result was that Z was in Australia for a total of more than 160 days and those days fell in every month of the income year.

During the visit to Australia at the start of the 20XX income year Z was in the City and Z was in the City a further X times during the 20XX income year.

When in the City, Z stayed in the home owned with the common law spouse, X.

With respect to the occupancy of the City home during the income year ended 30 June 20XX the total number of days spent by each individual at the home was given.

The travel diary shows that Z spent less than 150 days at the City home during the 20XX income year.

X spent more than 200 days at the City home in the 20XX income year.

In addition the children of X lived at the City home where R spent more than 295 days and E spent more than 170 days during the 20XX income year.

Given that R who was present at the City home for more than 295 days in the 20XX income year is a university student it is likely that those days coincided largely with the university academic year.

Similarly, given that E, who was present at the City home for 180 days in the 20XX income year, is also a university student it is likely that those 180 days likewise coincided largely with the university academic year. However, it is noted that “for the most part of the period from July 20WW to February 20XX, X's child E, was travelling overseas”. Accordingly, it is understood that the bulk of those 180 days would fall in the period from February 20XX to 30 June 20XX.

A comparison of Z s travel diary with the table listing X's travel movements shows that Z and X were in Australia at the same time for 144 days. Further with respect to those 144 days Z spent 130 days at the The City home.

Where Z's presence occurred during the university academic year in the 20XX calendar year it is likely that X's children may also have been present at the City home.

Apart from the actual presence of Z and X in the City home they owned together and the strong personal relations with Australia which that represents Z has other personal connections to Australia.

Evidence of the personal connections and the strength of those connections are discussed below.

In the information provided regarding Z's employment with M Pty Ltd were the following statements:

...

Further information was provided as follows:

These statements evidence a strong personal connection to Q of M Pty Ltd and in turn to Australia.

In addition Z had other personal and economic connections to Australia.

Z had a bank account in Australia in the 20XX income year.

Z held an Australian Medicare card in the 20XX income year.

Z had Private Health cover in Australia in the 20XX income year.

Z held an Australian driver's licence in the 20XX income year.

In the 20XX income year Z owned a motor vehicle that was located in Australia. The motor vehicle, which had been purchased in 20ZZ, was garaged at the City home.

There is also the commercial role of Z as a director and a member of the Audit Committee of P Ltd, which required Z to visit Australia on a regular basis.

Turning to the legislative definition of “resident of Australia” in subsection 6(1) of the ITAA 1936 it means, amongst other things, “a person, … who resides in Australia …”.

The term “resides” is not defined in the ITAA 1936 or the ITAA 1997. However, Taxation Ruling TR 98/17 “Income tax: residency status of individuals entering Australia” (TR 98/17) provides guidance with regards to the meaning of the word “resides”.

TR 98/17 relevantly provides as follows:

Ordinary meaning

It is considered the actual presence of Z in Australia as shown in the travel diary, the presence in Australia of X, the de facto spouse and other connections with Australia show that Z has had a regular and continuing presence in Australia and that Z has strong personal connections to Australia in the 20XX income year.

In summary, Z lived in a home in Australia which was owned with the common law spouse, X. Z lived in that home with X and also at times with the children of X. There was a motor vehicle which had been acquired in 20ZZ garaged at that home. Z had an Australian driver's licence and thus was able to drive that motor vehicle. Z had a bank account in Australia. Z held an Australian Medicare Card and had private health insurance that included coverage of the children of X.

In addition, consideration is given to the time spent by Z in Australia in the 20XX income year namely more than 160 days in more than 5 visits which meant that Z was in Australia at some time in each month of all 12 months of the 20XX income year; the presence of X in Australia for more than 225 days of the 20XX income year where those days fell in 9 different months of the 20XX income year, including 201 days spread over the 8 months from 20WW to 20XX inclusive; X's presence at the City home for more than 200 days; Z's presence at the City home for less than 150 days; the presence of R, X's child, at the City home for more than 295 days; as well as the presence of E, X's child, at the City home for more than 170 days.

These are the characteristics of a person residing in Australia.

It is noteworthy and significant that Z owns a half interest in the family home in The City whereas Z owns no real estate in Country B where the de facto spouse X owns a home that is shared by Z.

Further there are Z's strong business and personal ties with Q of M Pty Ltd that extend over 25 years. These ties are assiduously maintained and renewed by Z when in Australia.

Consideration of all aspects of Z's behaviour including dwelling in a family home with the de facto spouse and the de facto spouse's children plus the other connections to Australia leads to the conclusion that Z was residing in Australia according to ordinary concepts.

It is not necessary to examine the further statutory tests in subsection 6(1).

Therefore, Z is a resident of Australia in terms of subsection 6(1) of the ITAA 1936 for the income year ended 30 June 20XX. Consequently Z is in turn an Australian resident pursuant to subsection 995-1(1) of the ITAA 1997.

Question 2

Summary

The payments received by Z from M Pty Ltd, a company located in Australia, for personal services performed in Country B in carrying out consulting work, is ordinary income.

In terms of section 6-5 of the ITAA 1997 the assessable income of a resident of Australia includes ordinary income from all sources whether in or out of Australia.

The answer given to Question 1 above is that Z is a resident of Australia in terms of subsection 6(1) of the ITAA 1936.

You argue that the income is not assessable in Australia because amongst other things Z is a resident of Country B under Country B law.

As well it is contended that Z is a Country B resident for the purposes of the Country B tax treaty.

This is in terms of the tie-breaker test in the Country B tax treaty.

This argument is examined in detail.

There are multiple parts to the tie-breaker test in the Country B tax treaty.

Ultimately, it is necessary to consider the personal and economic relations of the individual as to whether they are closer to Country B or Australia respectively. The conclusion is that Z's personal and economic relations are closer to Australia.

Therefore Z is an Australian resident under the Country B tax treaty in terms of the tie-breaker test.

It is then necessary to consider the article of the Country B tax treaty regarding income derived from personal services. That article provides that the remuneration derived by an individual who is a resident of Australia in respect of personal services shall be subject to tax only in Australia unless the services are performed in Country B.

Where the services are performed or exercised in Country B the income may be taxed in Country B.

Where the consultancy fees received from M Pty Ltd are subject to tax in Country B and are also taxable in Australia a foreign income tax offset in terms of Division 770 of the ITAA 1997 may be available to Z depending upon the circumstances which existed in the 20XX income year.

As Z is an Australian resident under Australian income tax law and under the Country B tax treaty, the personal services article of the Country B tax treaty applies.

Accordingly, the payments received from M Pty Ltd by Z in Country B form part of Z's assessable income under subsection 6-5(2) of the ITAA 1997 in the 20XX income year.

Detailed reasoning

The treatment of the payments received by Z from M Pty Ltd is to be considered in terms of section 6-5 of the ITAA 1997 which deals with income according to ordinary concepts.

Section 6-5 reads:

The history of the circumstances in which the consultation fees in question were made is described as follows:

Further information provided as follows::

Later in a letter:

M Pty Ltd payments

This statement as to the M Pty Ltd payments being ordinary income is accepted.

As noted above section 6-5 of the ITAA 1997 provides that your assessable income includes ordinary income.

Accordingly, the M Pty Ltd payments are part of your assessable income.

However, It is necessary to consider the application of the relevant tax treaty, being the Country B tax treaty.

Country B Tax Treaty

On one hand, an argument is made out that Z is resident in Country B.

On the other hand in answer to Question 1 above in this report it has been determined by the Commissioner that Z is a resident of Australia in terms of subsection 6(1) of the ITAA 1936. This is on the basis that Z resided in Australia according to ordinary concepts during the income year ended 30 June 20XX.

Dual resident

Therefore, in the income year ended 30 June 20XX Z is a dual resident as Z is resident in Country B under the law of Country B and Z is a resident of Australia under the law of Australia.

Consequently, for the purposes of applying the taxing rights under the Country B tax treaty it is necessary to consider the tie-breaker test.

Note that the tie-breaker test does not change the individual's residency status for domestic law purposes.

Personal and economic relations

Personal relations

Family ties and relationships

Our interpretation of the above statements with respect to Z's ties to the relatives in Australia namely the parents; sibling and child show that Z's ties are weak.

However, on the other hand there is no indication of the strength of Z's relationship with the sibling who lives in Country B.

Therefore, these ties to Z's relatives are not determinative of Z's personal relations to either Australia or Country B. Hence they do not determine whether Z is an Australian resident or a Country B resident under the tax treaty.

De facto spouse X in Australia

With respect to Z's de facto spouse, X, it is noted that X resided in Country B in a dwelling which is owned by X for part of the 20XX income year.

However, during the 20XX income year X spent more than 225 days in Australia where X resided for 220 days at the City home owned by Z and X as tenants in common.

A comparison of Z's travel diary with the table setting out X's travel movements to and from Australia reveals that of the days X was in Australia Z was also present in Australia for more than 140 days. As well it is noted that of those days that Z and X were simultaneously in Australia Z spent more than 125 days at the City home.

In addition during the 20XX income year X's child R, resided at the City home for more than 295 days and X's child E, resided there for more than 170 days.

Q

The following information was provided:

Under each of the consultancies which Z had with M Pty Ltd all the advice provided by Z to M Pty Ltd was provided from Country B electronically or by telephone. Other work in connection with those consultancies was performed in Country B.

Other information was provided as follows:

Collectively, the above statements show a strong and enduring relationship between Z and Q.

Economic relations

(a) Consultancies with M Pty Ltd

During the year ended 30 June 20XX Z received payments from M Pty Ltd in respect of consultancies with M Pty Ltd.

The first consultancy commenced during the 20UU income year, and for the 20XX income year it operated as follows.

The second consultancy commenced during the 20XX income year and was described as follows:

(b) Real estate

“Australian accommodation” is described as:

“Country B accommodation” is described as:

Therefore Z owned a home in The City with X whereas Z did not own a home in Country B.

(c) Shares in companies

“ … Z did not own shares in any Country B companies.”

However, on the other hand Z owned shares in Australian companies as follows:

O Ltd XX,XXX X,XXX

P Ltd XXX,XXX XX,XXX

(d) Director of companies

In Country B

Z was a director of N Ltd, a private company.

In Australia

Z was a director of P Ltd.

Conclusion as to personal and economic relations

Z had strong personal relations with Australia in the income year ended 30 June 20XX because Z's de facto spouse X lived in Australia for more than 225 days. In addition to this relationship, X's children E and R resided at the City home for more than 170 days and more than 295 days respectively and thus Z also had this family and personal relationship to Australia.

In this family context there is Z's ownership with X of the family home in the City.

Z's longstanding personal relationship with Q of M Pty Ltd was another significant personal relationship with Australia.

With respect to Z's economic relations with Australia there was the interest in the family home; the consultancies with M Pty Ltd, the shares in Australian companies; and the role as a director of P Ltd.

With respect to personal relations with Country B Z resided at the home X owned in Country B. Accordingly as X is Z's de facto spouse there was a personal relation with Country B. However it is noted that X spent about more than 130 days only in Country B in the 20XX income year given that X spent more than 225 days in Australia in that income year.

With respect to economic relations with Country B Z did not own any real estate in Country B nor did Z own any shares in Country B companies; Z was a director of N Ltd, which is a Country B private company.

Accordingly, on balance Z has closer personal and economic relations with Australia in the income year ended 30 June 20XX.

Therefore in terms of the Country B tax treaty Z is a resident of Australia under the treaty.

Personal services article of the Country B tax treaty

As the payments received by Z in the 20XX income year from M Pty Ltd under each of the consultancies is income from personal services it is necessary to consider the personal services article of the Country B tax treaty which deals with the taxing rights regarding income from personal services.

In accordance with the result of the tie-breaker test, as explained above, Z is an Australian resident for treaty purposes,

The income derived by Z from personal services will be subject to tax only in Australia unless the services are performed in Country B in which case they may be taxed in Country B.

The work performed by Z for M Pty Ltd was performed only in Country B, thus the payments by M Pty Ltd for that work may be subject to tax in Country B.

Where the consultancy fees received from M Pty Ltd are subject to tax in Country B and are also taxable in Australia a foreign income tax offset in terms of Division 770 of the ITAA 1997 may be available to Z depending upon the circumstances which existed in the 20XX income year.

Conclusion

As Z is an Australian resident under Australian income tax law and under the Country B tax treaty, the personal services article of the Country B tax treaty applies.

Accordingly, the payments received from M Pty Ltd by Z in Country B form part of Z's assessable income under subsection 6-5(2) of the ITAA 1997 in the 20XX income year.

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