Edited version of private ruling

Authorisation Number: 1011616406628

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Ruling

Subject: Residency / Income from developing and selling software

1. Are you required to pay Australian income tax on the income you derive from selling your software through the internet?

Yes.

2. Are you required to pay Australian income tax on the income you derive from selling your software through a foreign company?

No.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

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 are a citizen of a foreign country.

You came to Australia in early 2010. Your Temporary Student Visa allows you to stay in Australia until mid 2012. You intend to obtain another visa after your current visa expires.

You are studying in Australia.

You are also a software developer. You intend to start selling your software and licences to your software through the internet and also through a company which specialises in reselling software and is located overseas.

You developed your software partly in the foreign country and partly in Australia. While you live in Australia, you will improve the software you have developed and develop new software. You expect to spend about 20 hours per week developing and selling software. You expect to receive more than $10,000 per year from selling your software. You will sell your software to make a profit. You expect to make a profit from selling your software.

Your spouse lives with you in Australia. You do not have any children.

In Australia, you and your spouse live in a house that you rent together with some of your friends.

You have a bank account in Australia. You intend to purchase a car in Australia.

While you live in Australia you will retain your flat and bank account in the foreign country.

You currently do not intend to join any clubs or other organisations in Australia. However, you may join an organisation here.

While you live in Australia you will spend most of your time studying and developing software.

You currently do not intend to travel outside Australia while you live here. However, you may undertake some travel.

Neither you nor your spouse is an Australian resident within the meaning of the Social Security Act 1991.

While you live in Australia, you will be a non-resident of the foreign country for the purposes of its tax law.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5.

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

Income Tax Assessment Act 1997 Subsection 6-5(3).

Income Tax Assessment Act 1997 Section 6-15.

Income Tax Assessment Act 1997 Section 768-910.

Income Tax Assessment Act 1997 Subsection 995-1(1).

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Summary

Question 1

You are required to pay Australian income tax on the income you derive from selling your software through the internet.

Question 2

You are not required to pay Australian income tax on the income you derive from selling your software through a overseas company.

Detailed reasoning

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that an Australian resident taxpayer's assessable income for an income year includes the ordinary income they derive from all sources during that year.

Subsection 6-5(3) of the ITAA 1997 provides that a foreign resident taxpayer's assessable income for an income year includes the ordinary income they derive from all Australian sources during that year.

Income derived from carrying on a business is ordinary income for the purposes of section 6-5 of the ITAA 1997.

Section 6-15 of the ITAA 1997 provides that an amount of ordinary income which is exempt income or non-assessable non-exempt income is not assessable income.

Section 768-910 of the ITAA 1997 provides that ordinary income derived by a temporary resident from a source other than an Australian source which is not remuneration for employment undertaken or services provided is non-assessable non-exempt income.

Subsection 995-1(1) of the ITAA 1997 provides that a taxpayer is a temporary resident if:

· they hold a temporary visa granted under the Migration Act 1958

· they are not an Australian resident within the meaning of the Social Security Act 1991, and

· their spouse is not an Australian resident within the meaning of the Social Security Act 1991.

Residency for Australian tax purposes

The term Australian resident is defined in subsection 995-1(1) of the ITAA 1997 to mean a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6(1) of the ITAA 1936 provides four tests to determine whether a person is a resident of Australia for the purposes of Australian tax law. These tests are:

· the resides test

· the domicile and permanent place of abode test

· the 183 day test, and

· the Commonwealth superannuation fund test.

A person only needs to satisfy one of these tests to be considered an Australian resident.

Under the resides test, a person who is considered to reside in Australia according to the ordinary meaning of the word 'reside' will be an Australian resident.

Taxation Ruling TR 98/17 provides guidelines for determining whether individuals visiting Australia will be considered to reside in Australia.

TR 98/17 provides as follows:

According to the Shorter Oxford English Dictionary, the ordinary meaning of the word 'reside' is to dwell permanently, or for a considerable time, to have ones settled or usual abode, to live in or at a particular place.

To determine whether an individual resides in Australia it is necessary to consider the length of time the individual spends in Australia and the individual's behaviour during that time.

An individual will be considered to reside in Australia when their behaviour over a considerable time has the degree of continuity, routine or habit that is consistent with them residing here. Generally, the Commissioner considers that six months is a considerable time for this purpose.

All the facts and circumstances that describe an individual's behaviour in Australia are relevant. In particular, the following factors are useful in describing the individual's behaviour:

· intention or purpose of presence

· family and business / employment ties

· maintenance and location of assets, and

· social and living arrangements.

No single factor is necessarily decisive and the weight to be given to each factor varies depending on the individual's circumstances.

The fact that an individual's main purpose or reason for being in Australia is education or employment indicates that they are residing here.

The fact that an individual's family live with them in Australia indicates that they are residing here.

The fact that an individual purchases a home and / or has other assets such as a motor vehicle and a bank account in Australia indicates that they are residing here.

Social and living arrangements are the way individuals interact with their surroundings during their stay in Australia. These arrangements may include joining sporting or community organisations, enrolling children in school, redirecting mail to Australia or committing to a residential lease. The fact that an individual joins an organisation in Australia, enrols children in school in Australia, redirects mail to Australia and / or commits to a residential lease in Australia indicates that they are residing here.

Carrying on a business

Subsection 995-1(1) of the ITAA 1997 provides that 'business' includes any profession, trade, employment, vocation or calling, but does not include occupation as an employee.

Income tax legislation does not provide any further guidance on what is meant by 'business'. However, Taxation Ruling TR 97/11 provides guidelines for determining whether the activities undertaken by a taxpayer amount to the carrying on of a business by the taxpayer.

TR 97/11 provides that the following indicators (obtained from case law) are relevant for determining whether the activities undertaken by a taxpayer constitute the carrying on of a business by the taxpayer:

· whether the activity has a significant commercial purpose or character

· whether the taxpayer has more than just an intention to engage in business

· whether the taxpayer has a purpose of profit as well as a prospect of profit from the activity

· whether there is repetition and regularity of the activity

· whether the activity is of the same kind and carried on in a similar manner to that of the ordinary trade in that line of business

· whether the activity is planned, organised and carried on in a businesslike manner

· the size, scale and permanency of the activity, and

· whether the activity is better described as a hobby, a form of recreation or a sporting activity.

Source of income

The Courts, Boards and Tribunals have held that:

To determine the source of business income it is necessary to consider which of the activities that constitute the carrying on of the business is the real source of the income. This depends upon the nature of the business.

The source of business income may be:

· the place where the contract is made

· the place where the contract is performed, or

· the place where payment is received.

Application to your circumstances

Residency status

You intend to live in Australia for more than two years. This is a considerable time.

You will live in Australia solely for educational purposes.

During the time you will live in Australia:

Your spouse will live with you.

You will have a bank account and a motor vehicle here.

You will retain your flat and bank account in the foreign country.

You will rent a house and you may join an organisation here.

You will spend most of your time studying and developing software.

You will undertake little if any travel outside Australia.

These facts indicate that your behaviour during this time will have the degree of continuity, routine or habit that is consistent with you residing in Australia.

Therefore, we consider that during the time you will live in Australia you will be an Australian resident for the purposes of Australian tax law under the resides test.

Carrying on a business

We consider that you will be carrying on a business of developing and selling software. This is for the following reasons:

· You will undertake the activities for the purpose of making a profit.

· You will make a profit from undertaking the activities.

· You will spend a significant amount of time undertaking the activities.

· You will derive a significant amount of income from undertaking the activities.

· You will sell the software to the general public via the internet and a foreign company.

Source of income

As indicated above, we consider that you will be carrying on a business of developing and selling your software. Hence, the income you will derive from selling the software will constitute business income. You developed the software in the foreign country and Australia. The software will be sold by you from Australia through the internet and by a foreign company from the foreign country. You will receive payments for the sale of the software in Australia.

We consider that the most important factor in determining the source of your business income and hence the real source of this income is the place where the contracts for the sale of the software will be made. Therefore, the income you will derive from the software you will sell will be from Australian sources and the income you will derive from the software the foreign company will sell will be from foreign sources.

Conclusion

Question 1

You will be an Australian resident for the purposes of Australian tax law. You will be carrying on a business of developing and selling your software. Hence, the income you will derive from selling the software through the internet will constitute ordinary income for the purposes of section 6-5 of the ITAA 1997. You will derive the income from Australian sources.

The double tax agreement between Australia and the foreign country does not prevent Australia from taxing the income.

Therefore, the income will be included in your assessable income pursuant to subsection 6-5(2) of the ITAA 1997.

Question 2

You will be an Australian resident for the purposes of Australian tax law. You will be carrying on a business of developing and selling your software. Hence, the income you will derive from selling the software through a foreign company will constitute ordinary income for the purposes of section 6-5 of the ITAA 1997.

You hold a temporary visa granted under the Migration Act 1958. Neither you nor your spouse will be an Australian resident within the meaning of the Social Security Act 1991. Hence, you will be a temporary resident for the purposes of section 768-910 of the ITAA 1997.

You will derive the income from foreign sources.

The income will not constitute remuneration for employment undertaken or services provided.

Hence, pursuant to section 768-910 of the ITAA 1997, the income will constitute non-assessable non-exempt income.

Pursuant to section 6-15 of the ITAA 199, an amount of ordinary income which is non-assessable non-exempt income is not assessable income.

Therefore, the income will not be included in your assessable income pursuant to subsection 6-5(2) of the ITAA 1997.

Other relevant matters

The following advice which does not form part of your private ruling is provided to answer the other questions you asked in your private ruling application:

Australian Business Number (ABN)

Section 8 of A New Tax System (Australian Business Number) Act 1999 (ABN Act) provides that an entity is entitled to have an ABN if they are carrying on an enterprise in Australia.

Miscellaneous Taxation Ruling MT 2006/1 provides guidelines for determining whether an entity is entitled to an ABN.

MT 2006/1 provides that an 'entity' includes an individual and that an 'enterprise' is an activity or series of activities done in the form of a business.

You are an individual. As indicated above, we consider that you will be carrying on a business of developing and selling software in Australia. Therefore, pursuant to section 8 of the ABN Act, you will be an entity carrying on an enterprise in Australia and will be entitled to have an ABN.

You will not be required to have an ABN as you will not be required to register for goods and services tax (GST) because your GST turnover will be less than $75,000 per year.

However, if you will not have an ABN the entities to whom you will sell your software may be required to withhold tax from the amounts they will be required to pay you for the software.

Record keeping

You are required to keep records of your business transactions. For further information please refer to the ATO publication Record keeping for small business which you can obtain from the ATO's website (ato.gov.au) or by phoning the ATO on 13 28 65.