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Ruling

Subject: foreign source income

1. Were you a resident of Australia for tax purposes while working in Countries A, B and C?

Yes.

2. Was your income from Countries A, B and C exempt from tax in Australia under section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936)?

No.

This ruling applies for the following periods:

Year ended 30 June 2007

Year ended 30 June 2008

Year ended 30 June 2009

The scheme commences on:

1 July 2006

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 have been an Australian citizen for a number of years.

Since the year ended 30 June 2005, you resided in either Country A or Country B, and more recently in Country C. You were providing consultancy services for various entities in these countries.

You and your spouse maintained a home overseas through the 2004-05 to 2007-08 income years, making holiday visits to Australia only. You spouse was with you continuously throughout this period.

You own a property in Australia where your relative lived throughout your time overseas. Utility bills were addressed to you and your spouse as registered owners of the property.

You resided in a rented apartment in Countries A, B and C.

During your time in Australia you were not employed and spent time on holidays in Australia, as well as spending some time at the residence you own in Australia.

In the 2007-08 income year you returned to Australia for an extended period of time. During this time you were not employed. You stated that it is normal for a person who is engaged in the provision of independent personal services such as you to international companies and organisations, would from time to time, not have fixed employment.

During your time in Australia you were on extended holidays only. You did not engage in activities associated with being a resident including entitlement to an age pension, seniors card or similar benefits in Australia which are available to you, nor joined as a member or been involved in any social activities.

You did not own a motor vehicle.

You did not have any bank account overseas. You held your bank account in Australia only because of the unreliability and insecurity of holding an account overseas.

You did not have any investments overseas.

You and your spouse have a family in Australia.

You had a Medicare card. You were entitled to hold a Medicare card as long as you were an Australian citizen even if you were a non-resident.

You paid no tax in the countries where you worked. As your work was international development aid, the income you earned was not subject to tax in the two countries where your services were performed.

You and your spouse were not a member of any Commonwealth Superannuation Fund.

There is a tax treaty between Australia and Country A.

There is no tax treaty between Australia and Country B or Country C.

You stated that you provided independent personal services as a consultant/international expert on projects in Countries A, B and C.

You received payments for daily fee and reimbursement of travel costs and expenses, international return air fares and return train fares.

You were not the holder of an office.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(7)

International Tax Agreements Act 1953

Reasons for decision

Summary

You were considered to be a resident of Australia for tax purposes while working in Countries A, B and C.

The income derived by you for consultancy services performed in these countries is not exempt from tax in Australia under section 23AG of the ITAA 1936.

You were not considered to be providing foreign service in the capacity of an employee or as a holder of an office for the purposes of subsection 23AG(7) of the ITAA 1936. Therefore, your income cannot be exempt under section 23AG of the ITAA 1936.

Detailed reasoning

Residency

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition includes four tests to ascertain whether a taxpayer is a resident of Australia for tax purposes. These tests are:

· the resides test

· the domicile test

· the 183 day test

· the superannuation test.

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

However, where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be a resident of Australia for tax purposes if they meet the conditions of one of the other three tests. Whether an individual resides in Australia is a question of fact and degree and not a question of law and is addressed on an annual basis for the purposes of each tax year.

The resides test

The ordinary meaning of the word reside, according to the dictionary definition, 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 lived and worked in Countries A, B and C apart from your frequent holidays in Australia, we consider that you were not a resident of Australia for tax purposes under the resides test.

The domicile test

If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

Domicile

Generally, persons leaving Australia temporarily would be considered to have maintained their Australian domicile unless it is established that they have acquired a different domicile of choice or by operation of law.

Taxation Ruling IT 2650 provides the Commissioner's guidelines on what factors should be considered in determining residency under this test.

The first part of this test requires a person to have a domicile in Australia.

As you did not make your home indefinitely in Countries A, B and C, your domicile remained in Australia during the 2006-07 to 2008-09 income years.

The second part of this test is to determine whether you have established a permanent place of abode outside Australia.

Permanent place of abode

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.

A person's permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case.

The ruling IT 2650 stresses that the duration of an individual's stay or intended stay out of Australia is not, of itself, conclusive and must be considered along with all the other relevant factors.

In your case, you accepted contracts to work for various entities in Country A or Country B, and more recently in Country C as an international expert.

You stated that it is your intention to continue with your overseas employment as a specialist expert and that during the 2006-07 to 2008-09 income years you did not have an intention to return to Australia and only returned for the purposes of holidays.

You and your spouse lived in a rented apartment in each of these countries where you worked. You did not own any property overseas. You owned a house in Australia where your relative lived.

Your connection and family ties are more significant in Australia. You and your spouse returned to Australia each year for annual holidays. In the 2007-08 income year, you and your spouse were in Australia for an extended period on holidays as you did not have work contracts. You did not have assets overseas. All your children lived in Australia. As there was insufficient evidence of your intention to make your home indefinitely outside of Australia, we consider that you have maintained your Australian domicile.

Based on these facts, we consider that you have not established a permanent place of abode in Countries A, B and C. You were therefore considered to be a resident of Australia for tax purposes under the domicile test.

Your residency status

As you were considered to be a resident of Australia under the domicile test it is not necessary to consider your residency status under the other tests mentioned (the 183 day test and the superannuation test).

Therefore, you were considered to be an Australian resident for tax purposes for the periods you were overseas.

Foreign earnings

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings of an Australian resident derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are generally exempt from tax.

Foreign service includes service in a foreign country as the holder of an office or in the capacity an employee and foreign earnings include income consisting of earnings, salary, wages and allowances (subsection 23AG(7) of the ITAA 1936).

Taxation Ruling TR 96/15 provides that whilst the term 'foreign earnings' may be sufficiently broad to include earnings derived from the provision of independent personal services by professional persons, such earnings fail to qualify for exemption under section 23AG of the ITAA 1936 as they are not rendered in the course of a foreign service that is as the holder of an office or in the capacity of an employee.

In your case, you stated that you provided independent personal services as an expert for various entities in Countries A, B and C and the contracts were a contract for services, rather than a contract of service. You were not a holder of an office.

Therefore, the income you earned from the provision of consultancy services in those countries is not exempt from tax in Australia under section 23 AG of the ITAA 1936.

As a result you are not considered to be engaged in the capacity of an employee or as a holder of an office for the purposes of subsection 23AG(7) of the ITAA 1936.

Since you were not considered to be providing foreign service as a holder of an office or in the capacity of an employee your income cannot be exempt under section 23AG of the ITAA 1936 (paragraph 20 of TR 96/15).

In view of this, it is not necessary to consider the other two conditions for exemption under section 23AG of the ITAA 1936 (that is, the 91 days continuous service and the qualification under subsection 23AG(2) of the ITAA 1936).

Tax treaty with Country A

In determining liability to Australian tax on foreign sourced income it is necessary to consider not only the income tax laws, but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

The Schedule to the Agreements Act contains the tax treaty between Australia and Country A.

The Article of Country A Agreement provides that income derived by an Australian resident in respect of professional services or other independent activities of a similar character are generally taxable only in Australia. However, where a fixed base is available to the individual in Country A for the purpose of performing the individual's activities, the income derived from the individual's activities in Country A may be taxed in Country A.

Therefore, your income earned in Country A is not exempt from tax in Australia under Country A Agreement.