Edited version of private ruling

Authorisation Number: 1011595816104

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Ruling

Subject: Residency - working overseas

Question 1

Are you an Australian resident for taxation purposes?

Answer

Yes.

Question 2

Is your foreign income from working in country X exempt from income tax in Australia?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2010

The scheme commences on:

1 July 2009

Relevant facts and circumstances

You are an Australian citizen.

You left Australia to work for a company in country X.

Your employer is a manufacturer of different types of Industrial compressors having manufacturing plants in various countries.

Your employment pass given by the relevant country X ministry will be expired in a few years.

You do not intend to reside overseas permanently.

All your living expenses in country X are paid by your employer.

You have not determined when you will be returning permanently to Australia.

Your family with spouse and children are living in Australia. In order to take care of family and children, you keep coming to city Q.

Your recreation leave taken during your foreign service had been accrued as a result of your foreign service.

You spend your recreation leave in another country.

You did not perform any work related duties while on leaves.

You sometimes operating from your city Q home and travelling from city Q as per the need and requirement.

You have a bank account in country X and your employer is paying your salary into this account.

You have a house and a block of land in another country.

You have joint bank accounts in Australia.

You and your spouse own a home in Australia in which your family live in.

You and your spouse are not members of the Commonwealth Government of Australia.

You state that you are paying income tax in country X as per the local government laws.

There is a tax treaty between Australia and country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AG(1AA)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Reasons for decision

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 reside 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.

The resides test

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'.

As you are residing outside of Australia, you are not considered to be residing in Australia under this 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.

Generally speaking, 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.

The expression, 'place of abode' refers to a person's residence, where one lives with one's family and sleeps at night (R v. Hammond (1852) 117 E.R. 1477 at p. 1488; Levene v. I.R.C (1928) A.C.217 and I.R.C v. Lysaght (1928) A.C.234).

Some of the factors that have been considered relevant by the Courts and Boards of Review/Administrative Appeals Tribunal and which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode include:

· the intended and actual length of the taxpayer's stay in the overseas country;

· whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

· whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

· whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

· the duration and continuity of the taxpayer's presence in the overseas country; and

· the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

It should be noted that no single factor will be decisive, but rather a general weighing of all the factors combined.

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

In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able to prove an intention to make their home indefinitely in that country.

In your case, you have advised that it is not your intention to make your home indefinitely in country X. You will be returning to Australia to visit your family. Your family home in Australia will be available to you at all times continuously as your family will be living in that house while you are in country X. Therefore, you are considered to have maintained your Australian domicile.

Whilst the duration of your time in country X is significant, your permanent place of abode is also considered to be within Australia for the following reasons:

· you have maintained your family home in Australia;

· your spouse and children will continue to live in the family home;

· you will visit your family regularly; and

· you continue to have strong ties with Australia (both financial and personal),

The 183-day test

The 183 day test is not relevant to your circumstances. It is used to ensure that individuals who are enjoying an extended holiday in Australia are not treated as residents. For example, a foreign backpacker who travels around Australia for 12 months will not be a resident because the usual place of abode is outside of Australia and the individual is not intending to take up residence in Australia.

The test does not provide that where an individual is residing according to ordinary concepts, being outside of Australia for more than 183 days will make that individual a non-resident of Australia.

The superannuation test

An individual is still considered to be a resident if that person is eligible to contribute to certain superannuation schemes for Commonwealth Government employees, or that person is the spouse or child under 16 of such a person.

This test does not apply to you as you and your spouse are not eligible to contribute to such superannuation schemes.

Your residency status

In view of the above information you are deemed to be a resident of Australia for taxation purposes for the period you will be working in country X under the domicile test of residency outlined in subsection 6(1) of the ITAA 1936.

Foreign income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident includes all the ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Generally, section 23AG of the ITAA 1936 provides that the foreign earnings of an Australian resident derived during a continuous period of not less than 91 days employment in a foreign country will be exempt from tax in Australia.

However, new rules apply to foreign income earned from 1 July 2009. Subsection 23AG(1AA) of the ITAA 1936 provides that those foreign earnings will not be exempt under section 23AG of the ITAA 1936 unless the continuous period of foreign service is directly attributable to any of the following:

· the delivery of Australian official development assistance by the taxpayer's employer (generally provided by AusAID or the Department of Foreign Affairs and Trade);

· the activities of the taxpayer's employer in operating a public fund covered by the deductible gift recipient categories overseas aid fund and developed country disaster relief fund;

· the activities of the taxpayer's employer where they are a charitable institution or religious institution which is income tax exempt because they are a prescribed institution located outside Australia or pursuing objectives principally outside Australia;

· the taxpayer's deployment outside Australia as a member of a disciplined force of Australia (generally considered to be the Australian Defence Force or Australian Federal Police); or

· an activity of a kind specified in the regulations.

In your case, you are employed to work in country X by a foreign company. Your employment does not fall into one of the exemption categories listed above.

As you do not satisfy any of the conditions for exemption under subsection 23AG(1AA) of the ITAA 1936. Therefore exemption under section 23AG of the ITAA 1936 does not apply.

Tax treaty

In determining the liability to Australian tax on foreign sourced income received by a resident taxpayer 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).

Australia has a tax treaty with country X (the country X Agreement) which operates to avoid the double taxation of income received by Australian and country X residents.

An Article of the country X Agreement provides that remuneration derived by an Australian resident from personal services exercised in country X may be taxed by Australia and country X.

However, another Article of the country X Agreement provides that remuneration derived from employment exercised in country X will be exempt from tax in country X if:

· the taxpayer is present in country X for a period or periods not exceeding in the aggregate 183 days in the country X year of income

· the remuneration is paid by or on behalf of an employer who is not an country X resident, and

· the remuneration is not deductible in determining the taxable profits of a PE which the employer has in country X.

In your case, that Article of the country X Agreement will not apply. Your employer is a resident of country X and your remuneration is deductible in determining the taxable profits of your employer's permanent establishment in country X. Your employment income will be tax in accordance with the first Article of the country X Agreement.

Taxation Ruling TR 2001/13 discusses the Commissioners views about interpreting tax treaties. Paragraph 23 states that the phrase may be taxed normally means that the source country has a non-exclusive entitlement to tax the income. However, under normal international tax principles, the other country may also continue to tax its residents on income, wherever sourced, provided it is permissible under domestic law, and the tax treaty does not explicitly prevent it from doing so.

The country x Agreement does not explicitly prevent Australia from taxing you on this income. As you are a resident of Australia, your foreign income from working in country X is not exempt from income tax in Australia and will be assessable under subsection 6-5(2) of the ITAA 1997.

Note

Where foreign earnings that are not exempt under the new rules are subject to Australian income tax, taxpayers will be eligible to claim a non-refundable foreign income tax offset (FITO) for foreign income tax paid on that income. This will relive double taxation for those individuals.