Edited version of private advice

Authorisation Number: 1052130044476

Date of advice: 5 July 2023

Ruling

Subject: Residency and foreign employment income

Question 1

Are you a resident of Australia for tax purposes from the respective dates you departed Australia for Country X?

Answer

No.

Question 2

Is the employment income you derived from working for an Australian government agency in Country X assessable in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian citizen.

You relocated to Country X in your employment with an Australian government agency for a period of more than 2 years.

You are renting accommodation in Country X.

You continue to be paid from the Australian government agency's payroll which includes super guarantee payments.

You have moved your life to Country X for the next few years and have substantially broken your ties with Australia.

You did not move to Country X for reasons other than to work.

You may only return to Australia once per year for two weeks at a time while you are based in Country X.

You do not have a home available to you in Australia; you were previously renting and gave up your lease.

You do not own any real estate in Australia or elsewhere.

You are a tax resident of Country X.

You are not a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976, nor are you the spouse of such a person.

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 section 995-1

International Tax Agreements Act 1953

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms 'resident' and 'resident of Australia', as applied to an individual, are defined in subsection 6(1) of the ITAA 1936.

The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are:

•         the resides test (also referred to as the ordinary concepts test)

•         the domicile test

•         the 183-day test, and

•         the Commonwealth superannuation fund test.

The resides test is the primary test for deciding the residency status of an individual. This test considers whether an individual resides in Australia according to the ordinary meaning of the word 'resides'.

Where an individual does not reside in Australia according to ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in Taxation Ruling TR 2023/1 Income tax: residency tests for individuals.

We have considered the statutory tests listed above in relation to your situation as follows:

The resides test

The ordinary meaning of the word 'reside' has been expressed as 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place': See Commissioner of Taxation v Miller (1946) 73 CLR 93 at 99 per Latham CJ, citing Viscount Cave LC in Levene v Inland Revenue Commissioners [1928] AC 217 at 222, citing the Oxford English Dictionary. Likewise, the Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

The observations contained in the case of Hafza v Director-General of Social Security (1985) 6 FCR 444 are also important:

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 involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248; and Keil v Keil [1947] VLR 383 - 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 - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains "home": see Norman v Norman (No 3) (1969) 16 FLR 231 at 235... [W]here the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as "home", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

The Commissioner considers the following factors in relation to whether a taxpayer is a resident under the 'resides' test:

•         period of physical presence in Australia

•         intention or purpose of presence

•         behaviour while in Australia

•         family and business/employment ties

•         maintenance and location of assets

•         social and living arrangements.

It is important to note that no one single factor is decisive, and the weight given to each factor depends on each individual's circumstances.

Because the ordinary concepts test is whether an individual resides in Australia, the factors focus on the individual's connection to Australia. Having a connection with another country, or being a resident of another country, does not diminish any connection to Australia: Logan J in Pike v Commissioner of Taxation [2019] FCA 2185 at 57 reminds us that 'it is no part of the ordinary meaning of reside in the 1936 Act that there be a "principal" or even "usual" place of residence. ... It is important that ... "resident" not be construed and applied as if there were such adjectival qualifications.' For this reason, the test is not about dominance or exclusivity.

Application to your situation

We have taken the following into consideration when determining whether you meet the resides test:

•         You relocated to Country X to live and work for more than 2 years

•         You have substantially broken your ties with Australia

•         You do not have a home available to you in Australia

•         You will make minimal return visits to Australia.

You have moved your life to Country X for a substantial period of time and will not maintain a continuity of association with Australia during that period.

Therefore, you are not a resident of Australia under the resides test from when you relocated to Country X.

You may still be an Australian resident if you meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

Domicile test

Under the domicile test, you are a resident of Australia if your domicile is in Australia unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

Domicile

Whether your domicile is in Australia is determined by the Domicile Act 1982 and the common law rules on domicile.

Your domicile is your domicile of origin (usually the domicile of your father at the time of your birth) unless you have a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and hold the positive intention to make that country your home indefinitely. Your domicile continues until you acquire a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

Application to your situation

In your case, you are a citizen of Australia and there is no evidence to say that you intend to make Country X your home indefinitely in the sense that you will acquire a domicile of choice in that country.

Therefore, your domicile remains Australia.

Permanent place of abode

If you have an Australian domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place of abode is outside Australia. This is a question of fact to be determined in light of all the facts and circumstances of each case.

'Permanent' does not mean everlasting or forever, but it is to be distinguished from temporary or transitory.

The phrase 'permanent place of abode' calls for a consideration of the physical surroundings in which you live, extending to a town or country. It does not extend to more than one country, or a region of the world.

The Full Federal Court in Harding v Commissioner of Taxation [2019] FCA 29 held at paragraphs 36 and 40 that key considerations in determining whether a taxpayer has their permanent place of abode outside Australia are:

•         whether the taxpayer has definitely abandoned, in a permanent way, living in Australia

•         whether the taxpayer is living in a town, city, region or country in a permanent way.

Relevant factors as to whether your permanent place of abode is overseas include:

•         length of overseas stay

•         nature of accommodation, and

•         durability of association.

As with the factors under the resides test, no one single factor is decisive, and the weight given to each factor depends on the individual circumstances.

TR 2023/1 states that if you leave Australia for an unspecified or substantial period, pack up your home in Australia, set up a home in a foreign country and live there with your family returning only occasionally such as for cultural events, special celebrations or annual leave, you are likely to meet the description of someone who has abandoned Australia as a place of residency and commenced living permanently overseas. This is despite the fact that you may at some point intend to return to Australia.

For practical purposes, it is convenient to set some 'rule of thumb' on what substantial means. Broadly, 2 years is considered to be a substantial period of time.

Application to your situation

We have taken the following into consideration when deciding whether your permanent place of abode is outside Australia:

•         You relocated to Country X to live and work for an expected period of more than 2 years

•         You have substantially broken your ties with Australia

•         You do not have a home available to you in Australia

•         You will make minimal return visits to Australia

The Commissioner is satisfied that your permanent place of abode is outside Australia.

Therefore, you are not a resident of Australia under the domicile test.

183-day test

Where a person is present in Australia for 183 days or more during the year of income the person will be a resident, unless the Commissioner is satisfied that both:

•         the person's usual place of abode is outside Australia, and

•         the person does not intend to take up residence in Australia.

Application to your situation

You will not be present in Australia for 183 days or more during the relevant income years.

Therefore you are not a resident under this test.

Superannuation test

An individual is a resident of Australia if they are either a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976, or they are the spouse, or the child under 16, of such a person.

Application to your situation

You are not a member on behalf of whom contributions are being made to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) or a spouse of such a person, or a child under 16 of such a person.

Therefore, you are not a resident under this test.

Conclusion

As you do not satisfy any of the four tests of residency, you are not a resident of Australia for income tax purposes from when you departed Australia for Country X until the income year ending 30 June 20XX.

Question 2

Subsection 6-5(3) of the ITAA 1997 provides that if you are a foreign resident, your assessable income includes:

a)  the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

b)  other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

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 treaty (or agreement).

Generally, Australia's tax treaties operate to reduce or eliminate double taxation caused by overlapping tax jurisdictions and provide a level of security about the tax rules that will apply to particular international transactions by allocating taxing rights between the jurisdictions over different categories of income.

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. 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.

Paragraph 34 of Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements (TR 2001/13) states that in regard to the 'shield, but not a sword' issue, some of Australia's DTAs may operate to have what amounts to some 'sword-like' effect in practice because of the inclusion in them of a 'Source of Income'article.

These Source of Incomearticles or legislative source provisions provide broadly that items of income that one of the Contracting States may tax under the DTA shall be treated as having a source there for the purposes of domestic law, as well as for relevant DTA purposes. One purpose of these rules is to ensure that each country is empowered in its domestic law to exercise the taxing rights allocated to it (in the DTA) over residents of the other country. Those DTA source rules thus prevent any argument that the income does not have, by domestic law rules, a source in the country that is, under the DTA rules, entitled to tax that income in the hands of a resident of the other country (paragraph 35 of TR 2001/13).

Article XX of the Country X agreement deals with 'Government service' and states, relevantly:

1. Remuneration (other than a pension or annuity) paid by a Contracting State or a political sub-division or a local authority thereof to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in that State. However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the recipient is a resident of that other State who:

(a) is a citizen or national of that State; or

(b) did not become a resident of that State solely for the purpose of performing the services.

In your case, you are employed by an Australian government agency which means your employment income is derived in respect of 'government service'. Accordingly, you are being paid by a Contracting State, being Australia, in respect of services rendered in the discharge of governmental functions.

Therefore, Article XX provides that your remuneration is taxable only in Australia, as the exception in the second part of paragraph 1 does not apply as you are not a citizen or national of Country X and went to Country X to become a resident solely for the purpose of performing the services.

Further, it is also necessary to read Article XX in conjunction with Article XY which deals with 'Sources of income'. Article XY states that income derived by a resident of one of the Contracting States which, under any one or more of certain Articles, including XX, may be taxed in the other Contracting State, shall for the purpose of Article XZ, and of the income tax law of that other State, be deemed to be income from sources in that other State.

In your case, you are a resident of Country X and your employment income is taxable in Australia under Article XX. Consequently, Article XY has the effect that for the purposes of the income tax law of Australia your employment income is deemed to be income from sources in Australia.

Therefore, your employment income is assessable under subsection 6-5(3) of the ITAA 1997 as the income is deemed to have an Australian source.

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