Edited version of private ruling

Authorisation Number: 1011692924012

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Ruling

Subject: Residency - Foreign allowances - Medicare levy surcharge

Questions:

1. Are you an Australian resident for income tax purposes?

Answer: Yes.

2. Are you entitled to a deduction against your assessable income for expenses associated with setting up a temporary accommodation in a foreign country for the first twelve month of your stay?

Answer: No.

3. Are you entitled to a foreign income tax offset in your Australian tax return for the foreign county Federal income tax and State income tax?

Answer: Yes.

4. Are you entitled to a foreign income tax offset in your Australian tax return for the foreign country Federal Medicare tax, and Federal Social Security tax, State disability insurance tax?

Answer: No.

5. Are you liable to the Medicare levy surcharge for the period you suspended your Australian private patient hospital insurance?

Answer: Yes.

This ruling applies for the following period:

Income year ended 30 June 2010

Relevant facts and circumstances

You are a citizen of foreign country Y and Australia and you normally reside in Australia.

You took a temporary job to work in foreign country X on a two year visa.

You have been working in foreign country X since July 2009 and you intend to return to Australia permanently around early 2011.

You did not work for the same employer in Australia prior to accepting this position in foreign country X.

You retained your family home in Australia where one of your family members is house-sitting.

When you first arrived in foreign country X, you initially stayed in a hotel for two weeks until you were able to rent an apartment for 13 months. You then moved to another apartment for your remaining stay in foreign country X.

Your spouse visited you in 2009 for two weeks and then joined you at then end of 2009. Your spouse remained with you in foreign country X and will return to Australia permanently early 2011.

You were not paid any allowances whilst you were at your normal place of work in foreign country X. You were only paid allowances when you undertook short business trip(s) (usually for one to two days) away from your normal work place.

You lodged a tax return in foreign country X.

You were advised by your foreign country X accountant that as you were temporarily away from your tax home in Australia you are entitled to claim the following expenses in the first 12 months of being away from your home:

· Vehicle expenses - car rental until you purchased a car and mileage for the use of the car to and from work

· Depreciation costs of furnishing a home in foreign country X

· A daily allowance for meals and incidentals.

You postponed your Australia private health insurance for 12 months from when your spouse joined you in foreign country X.

You have private health insurance in foreign country X.

The combined gross income of you and your spouse is over the medicare levy surcharge income threshold.

You are not a prescribed person exempt from the medicare levy under section 251U of the Income Tax Assessment Act 1936 (ITAA 1936).

Relevant legislative provisions

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

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

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

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Subsection 8-1(1)

Income Tax Assessment Act 1997 Subsection 8-1(2)

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Subsection 770-15(1)

International Tax Agreements Act 1953 Schedule 2 Article 22

Medicare Levy Act 1986 Section 8D

National Health Act 1953 section 5A

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a resident's assessable income includes income from all sources whether in or out of Australia. However, subsection 6-5 (3) of the ITAA 1997 provides that a foreign resident's assessable income includes statutory income from all Australian sources.

You derive income and allowances while you were working in foreign country X. Salary and allowances are considered to be sourced where the services are performed. Therefore, your salary and allowances derived while you were working in foreign country X are considered to be foreign sourced and it is necessary to first consider whether you are an Australian resident for income tax purposes.

Question 1

Residency

An Australian resident is defined in subsection 995-1(1) of the ITAA 1997 to be 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', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

1. The resides test

2. The domicile test

3. The 183 day test

4. 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.

You are not considered to be a resident of Australia under 'the resides' test as you are not residing in Australia during the period you were in foreign country X. Therefore, you are not a resident under 'the resides test' for the relevant period.

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.

2. The domicile test

Domicile is a legal concept to be determined according to the Domicile Act 1982 and to the common law rules which the courts have developed in the field of private international law. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home.

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.

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 his or her home indefinitely in that country.

In your case, you are an Australian citizen and you normally reside in Australia. You intend to return to Australia at the end of your temporary posting. Therefore, you have maintained your Australian domicile as you have not shown an intention to make your home indefinitely in that country.

Under the domicile test a person is considered a resident of Australia, if his or her domicile is in Australia, unless the Commissioner is satisfied that the person's 'permanent place of abode' is outside of Australia.

Permanent place of abode

The expression 'place of abode' refers to a person's residence, where one lives with their family and sleeps at night. In essence, a person's place of abode is their dwelling place or the physical surroundings in which they live.

A permanent place of abode does not have to be 'everlasting' or 'forever', or an abode in which a person intends to live for the rest of their life. A person living overseas who intends to return to Australia in the foreseeable future is not prevented in the meantime from setting up a permanent place of abode elsewhere.

Taxation Ruling IT 2650 provides at paragraph 15 that a 'permanent place of abode' according to fisher J in 79 ATC at 4317; 9 ATR at 910-911, is:

the taxpayer's fixed and habitual place of abode. It is his home, but not his permanent home. It connotes a more enduring relationship with the particular place of abode. Material factors for consideration will be the continuity or otherwise of the taxpayer's presence, the duration of his presence and the durability of his association with the particular place.

IT 2650 sets out the factors that are considered relevant in determining whether a person's has established a permanent place of abode is outside of Australia. The weight given to each factor will vary depending on the circumstances of each case and no single factor is conclusive. These are summarised at paragraph 5 of IT 2650 as:

· the intended and actual length of your stay in the overseas country;

· any intention either to return to Australia at some definite point in time or to travel to another country;

· the establishment of a home outside Australia;

· the abandonment of any residence or place of abode you may have had in Australia;

· the duration and continuity of your presence in the overseas country; and

· the durability of association that you have with a particular place in Australia.

In your case, you intend to return to Australia at the end of your work in foreign country X. You continue to maintain your home in Australia where one of your family members is house-sitting. The duration and continuity of your presence and association with foreign country X is temporary. Therefore, we do not consider that you have established a permanent place of abode in foreign country X.

As you have an Australian domicile and the Commissioner is not satisfied that you have established a permanent place of abode outside of Australia, you will be considered to be an Australian resident for income tax purposes under this test.

Since you are considered to be a resident under 'the domicile test' it is not necessary to consider the remaining two tests for residency. You are an Australian resident for income tax purposes for the 2009-10 income year.

As a resident you are assessable in Australian on your foreign and Australian source income under subsection 6-5(2) of the ITAA 1997.

Question 2

Deductibility of expenses associated with setting up a temporary accommodation in Foreign Country X for the first twelve month of your stay such as vehicle, depreciation costs of furnishing and a meal and incidental expenses

Under subsection 8-1(1) of the ITAA 1997 a deduction is allowable for any loss or outgoing to the extent that is incurred in gaining or producing your assessable income. However, subsection 8-1(2) of the ITAA 1997 provides that a loss or outgoing to the extent that they are of a capital or private or domestic nature are not are allowable.

You were advised by your foreign country X accountant that you were able to claim expenses for vehicle - car rental until you purchased a car and mileage to and from work, depreciation cost of furnishing the home and a daily allowance for meals and incidentals during the first twelve months of working in a new job in foreign country X.

These expenses are considered to be of a private or domestic nature and are not deductible in Australia whether you are considered to be living away from home (LAFH) or not. No deductions are allowable for expenses incurred for LAFH in your Australian tax return. The living-away-from-home-allowance (LAFHA) is subject to fringe benefit tax and it does not form part of the assessable income hence no LAFH deductions are allowable against your assessable income. The expenses that are for LAFH are not considered to be incurred in gaining or producing your assessable income.

Miscellaneous Taxation Ruling MT 2030 looks at the distinction between travelling on work allowances and living-away-from home allowances, their treatment for tax purposes and related expenses.

Paragraphs 35 - 43 of MT 2030 provides that when an employee is travelling on business on behalf of an employer, expenses of travel are incidental to the proper carrying out of the employment function and do not have the character of being private or domestic expenses.

A living-away-from-home allowance is paid where the employee has moved and taken up temporary residence away from his or her usual place of residence so as to be able to carry out employment duties for a time at the new (but temporary) workplace. A travelling allowance, on the other hand, is paid because the employee is travelling in the course of performing his or her job. In the former case, there is a change of job location and an actual change of residence to a place at or near that location. In the latter, the employee does not change job locations but simply travels in order to carry out the requirements of the job.

When an employee is travelling on work, unlike living-away-from-home, there is generally no change of employment location. It is usually for a relatively short period of time.

Travelling allowances form part of the employee's assessable income against which appropriate deductions may be allowed for the cost of meals, accommodation and incidental expenses incurred while the employee is travelling in the course of carrying out the duties of employment. However, there is no deduction for living away from home as any allowance paid for living away from home is subject to fringe benefit tax and does not form part of the employee's assessable income.

You stated that you were not paid any allowances whilst you are at your normal work place. You are only paid allowances when you undertook short business trips away from your normal place of work.

The expenses incurred for vehicle from home to work, depreciation costs of furnishing a home and the daily costs of meals and incidentals while you are working at your usual or normal work place in foreign country X is not deductible as you are not travelling on work. These expenses, even if, incurred in the first twelve months of your stay in foreign country X are not deductible. They are considered to be private or domestic expenses. You are not considered to be travelling on work while you work at your normal work place in foreign country X.

Furthermore, Taxation Ruling IT 112 deals with the deductibility of travelling expenses between a taxpayer's residence and place of employment. It looks at the decision in Lunney and Hayley v. FCT (1958) 100 CLR which affirmed the position that travels between home and a person's regular place of employment or business are ordinarily private travel. While travel to work is a necessary pre-requisite to earning income it is not undertaken in the course of earning that income. Put at its simplest, travel to work is private; travel on work is business.

Accordingly, the vehicle expenses, depreciation costs of furnishing the home, a daily allowance for meals and incidentals and expenses associated with setting up a temporary accommodation during the first twelve months of a change in work place are not allowable deductions under subsection 8(1) of the ITAA 1997.

However, meals, accommodation and incidental expenses incurred when travelling on business on behalf of an employer during your short business trips away from your normal work place, are incidental to the proper carrying out of the employment function and do not have the character of being private or domestic expenses. Therefore such expenses are allowable deductions under subsection 8(1) of the ITAA 1997 but subject to the substantiation rules.

Under Subdivision 900-B of the ITAA 1997, a deduction is not allowable for a work expense, including a meal allowance expense or travel allowance expense, unless the expense qualifies as a deduction under a provision of the Act and written evidence of the expense has been obtained and retained by the employee taxpayer.

Subdivision 900-B also provides that the substantiation requirement to obtain written evidence does not apply to claims by employee taxpayers for expenses covered by a domestic travel allowance or overseas travel allowance, whether or not the allowance is paid under an industrial instrument, if the amount of the claim for losses or outgoings incurred does not exceed the reasonable amounts.

An expense must be actually incurred before a claim can be made. A taxpayer cannot automatically claim a deduction just because they receive an allowance. If an expense is incurred partly for work purposes and partly for private purposes, only the work-related portion is deductible.

Unless the following exception applies, all allowances must be shown as assessable income in the employee's tax return. However where:

· the allowance is not shown on the employee's payment summary;

· the allowance received is a bona fide overtime meal allowance or a bona fide travel allowance;

· the allowance received does not exceed the reasonable amount; and

· the allowance has been fully expended on deductible expenses,

the allowance received is not required to be shown as assessable income in the employee's tax return. Where the allowance is not required to be shown as assessable income in the employee's tax return, and is not shown, a deduction for the expense cannot be claimed in the tax return.

The exception from substantiation for work-related expenses covered by an overseas travel allowance applies only to expenses for food, drink and incidentals. The exception does not apply to accommodation costs (subsection 900-55(1) of the ITAA 1997). This means that receipts or other documentary evidence is required to substantiate overseas accommodation expenses.

In summary:

· Expenses associated with setting up a temporary accommodation in foreign country X are not deductible, even if incurred in the first twelve months of your stay.

· Meals, accommodation and incidental expenses incurred when you are travelling on work on short business trips away from your normal work place are deductible under subsection 8(1) of the ITAA 1997 but subject to the substantiation provisions.

· The exception to the substantiation applies if the allowance received is a bona fide travel allowance and the allowance received does not exceed the reasonable amount; and the allowance has been fully expended on deductible expenses.

· Where the exception applies, the allowance is not included in the assessable income and no deductions are claimed against it. In all other cases, the travel allowance is assessable and expenses relating to the travel are deductible subject to the substantiation provisions.

Taxation Determination TD 2009/15 sets out the amounts that the Commissioner considers are reasonable for the substantiation exceptions in Subdivision 900-B of the ITAA 1997 for 2009-10 income year. This Taxation Determination should be read together with Taxation Ruling TR 2004/6 which explains the substantiation exceptions and the way in which these expenses are able to be claimed. TD 2009/15 and TR 2004/6 can be obtained from the Tax office website www.ato.gov.au.

Questions 3 & 4

Entitlement to Foreign income tax offset (FITO)

Section 770-10 of the ITAA 1997 is the primary provision under which a foreign income tax offset arises. FITO can be claimed for foreign income tax paid by a taxpayer in respect of an amount that is included in their assessable income.

Foreign income tax is a tax imposed by a law other than an Australian law, on income profits or gains (subsection 770-15(1) of the ITAA 1997).

In determining the availability of a foreign income tax offset it is also necessary to consider the foreign country X Agreement contained in Schedule X to the International Tax Agreements Act 1953 (Agreements Act). Subsection 4(1) of the Agreements Act provides that the ITAA 1936 and the ITAA 1997 must be read as one with the Agreements Act.

Article 22(2) of the foreign country X provides that where foreign country X tax has been imposed in respect of foreign country X sourced income in accordance with paragraph (3) Article 1 of the foreign country X Agreement by a resident of Australia shall be allowed, a credit against Australian tax payable on that income. The credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as it may be in force.

Article 2(1) of the foreign country X Agreement identifies the taxes to which the Agreement shall apply. The foreign country X tax covered by the Agreement is the Federal income taxes imposed by the Internal Revenue code.

Article 2(2) of the foreign country X Agreement states that the Convention shall also apply to any identical or substantially similar taxes which are imposed by either Australia or foreign country X after the date of signature of this Convention, in addition to existing taxes in place. At the end of each calendar year, the competent authority of each country shall notify the competent authority of the other of any substantial changes made during the year.

In interpreting the wording of the tax treaty, the Commissioner accepts in Taxation Ruling TR 2001/13 that it is appropriate to have reference to the OECD Commentary on the Model Tax Convention on Income and Capital (Condensed Version 2005) (the OECD Model Commentary).

The OECD Commentary on this paragraph provides that:

· Social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received shall be excluded from the list of taxes covered by the Convention, and

· It is immaterial on behalf of which authorities such taxes are imposed; it may be the State itself or its political subdivisions or local authorities (constitutes States, regions, provinces, department, cantons, district etc).

Based on the OECD Commentary, the taxes covered by the Foreign Country X Agreement that an Australian resident shall be allowed as a FITO would be the Federal income tax and the State income tax. These taxes are imposed on income at the Federal and the State level.

The Federal Medicare tax, Federal Social Security tax and the State Disability insurance tax are not taxes covered by the foreign country X Agreement, as they are social security charges or any other charges paid where there is connection between the tax or levy and the intended benefits to the individual.

Since you have paid the foreign country X's federal and state income tax and your foreign income is assessable in Australia, FITO is available for these two taxes subject to the FITO limits. All the other taxes and levy paid by you are not eligible for FITO against Australian tax payable as explained above.

Question 5

Medicare levy surcharge

Medicare levy liability of individual persons is dependent on the person being a "resident of Australia" as that expression is used in paragraph 251S(1)(a) of the ITAA 1936. The expression "resident of Australia" is defined in subsection 6(1) of the ITAA 1936 and bears the same meaning contained in paragraph 251S(1)(a) of the ITAA 1936 (paragraph 14 of Taxation Ruling IT 2615).

In addition, section 8D of the Medicare Levy Act 1986 (MLA 1986) provides that a taxpayer will be subject to a medicare levy surcharge where, for the whole or part of a year of income, they:

· are married;

· they or at least one of the their dependants is not covered by an insurance policy that provides private patient hospital cover, and

· are not a prescribed person.

The thresholds for the 2009-10 income year are:

· $73,000 if you are a single person with no dependent children

· $146,000 if you are part of one of the following:

o a family (including a couple) with or without dependent children

o a single parent family.

Where they satisfy all the above requirements for the whole of the year of income and the person is a member of a couple their combined taxable income exceeds $146,000, a surcharge at 1 per cent of the person's taxable income is payable in addition to the amount of Medicare levy otherwise payable. A taxpayer who is a member of a couple plus one dependent, the threshold is still $146,000. For two or more dependants, the threshold is increased by $1500 for each dependant after the first dependant.

A person is taken to have private patient hospital cover if the insurance policy providing cover is an 'applicable benefits arrangement', within the meaning of section 5A of the National Health Act 1953 (NHA), to which paragraph 5A(1)(a) applies (new subsection 3(5) ). Only 'registered organizations', as defined in the Health Act, can provide an 'applicable benefits arrangement'.

You are an Australian resident for income tax purposes and not a prescribed person exempt from the Medicare levy. You suspended your Australian private patient hospital cover for about twelve months while overseas and entered into private health insurance in foreign country X. The overseas organisation is not a 'registered organization' under the Health Act. You did not therefore have the appropriate 'private patient hospital cover' as required under section 8B of the ITAA 1936 during the period when your Australian private hospital cover was suspended.

As your combined income exceeded the family income threshold, the medicare levy surcharge will apply under paragraph 8B(2)(b) of the MLA 1986 for those days in the relevant income years when your Australian private patient hospital cover was suspended.