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Authorisation Number: 1011770166896

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Ruling

Subject : Residency and foreign employment income

Question 1

Are you an Australian resident for tax purposes?

Answer 1

Yes.

Question 2

Is your income derived as staff in Country A assessable in Australia?

Answer 2

Yes

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commenced on:

01 July 2009

Facts:

You departed Australia on a specific date in the 2010 financial year and commenced living in Country A on a specific date in the 2009 financial year.

You arrived in Country A on a visa which is valid for a specific period of time from a specific date in the 2009 financial year to a specific date in the 2012 financial year.

You were granted a specific number of months Leave Without Pay (LWOP) from your employer in Australia and were paid your 'paid leave' entitlements to a specific month in the 2010 financial year.

You have since resigned your position with your Australian employer after the expiry of the maximum LWOP period allowed by this employer.

You are currently employed by Employer A as staff in Country A.

You are currently employed as a fulltime wage/salary earner on a temporary contract of employment due to expire at the end of a specific month in the 2012 financial year.

You are employed for a specific period, after which you receive paid holidays for a specific period.

Your last period of paid holidays will occur from a specific date in the 2012 financial year up until the expiry of your temporary employment contract at the end of a specific month in the 2012 financial year.

You have worked in Country A as staff with your current employer and, prior to this, for Employer B for a combined period of a specific amount of months from a specific date in the 2010 financial year up to a specific date in the 2011 financial year.

Your intention was to apply for another visa for an additional specific period of stay, and to gain a supplemental qualification in Country A during this time.

You have decided not to pursue this course of action as you state that you will not be eligible for another visa after the expiry of your current visa on a specific date in the 2012 financial year due to changes in Country A's immigration law.

Before you moved and took on your current employment, you were a resident of Australia for tax purposes.

You intend to return to Australia at the expiry of your Country A visa and take up employment as staff.

· You continue to maintain a link with Australia in the following manner:

· You are maintaining local bank accounts in Australia

· You are maintaining your existing investments in Australia

· You are on the Australian electoral roll

· You are maintaining some of your possessions in Australia

· You have no family or relatives in Country A

· Your immediate family reside in Australia

· You are living in a rented room in Country A with no formal lease agreement

· You are not an eligible member of a Commonwealth superannuation scheme

Your employment income is subject to tax in Country A under their domestic law.

There is a Tax Treaty with Country A.

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 6-15(2)
Income Tax Assessment Act 1997 section 11-15
Income Tax Assessment Act 1936 section 23AG
Income Tax Assessment Act 1936 subsection 23AG (1AA)

International Tax Agreements Act 1953

Reasons for decision

Residency Status

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

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 resides test

· the domicile test

· the 183 day test

· the superannuation test

The first two tests are examined in detail in Taxation Ruling IT 2650.

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 satisfy 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. 3rd 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 will be residing in Country A for a specific period, you are not considered to be residing in Australia.

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.

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

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

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 your case:

You advised that you will return to Australia after a specific number of years. Therefore, you are considered to have maintained your Australian domicile.

In addition, although you will be living in Country A for a specific number of years, your associations with Australia are considered to be more significant as you are retaining your belongings, bank accounts and investments in Australia. You are also remaining on the Australian electoral roll and only living in rental accommodation in Country A, with no formal lease agreement in place.

Although you are currently working in Country A, your position is subject to a temporary contract of employment and is due to cease at the end of a specific month in the 2012 financial year with no possibility of extension.

Based on these facts, the Commissioner is not satisfied that you have established a permanent place of abode in Country A.

You are, therefore, considered to be a resident of Australia for tax purposes under the domicile test.

Residency status

As the Commissioner is satisfied that you are a resident of Australia under the domicile test of residency outlined in subsection 6(1) of the ITAA 1936 there is no need to examine the remaining tests.

Therefore, you are considered to be an Australian resident for tax purposes for the period you will be in Country A.

Foreign Employment Income

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes 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 purpose of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not included in assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income that may be exempt. Included in this list is section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), which deals with overseas employment income.

Subsection 23AG(1) of the ITAA 1936 provides that where Australian resident individuals are engaged in foreign service for a continuous period of not less than 91 days, foreign earnings derived from that foreign service are exempt from tax in Australia. However, new subsection 23AG(1AA) of the ITAA 1936, which took effect from 1 July 2009, 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 the following:

· delivery of Australian official development assistance by your employer

· activities of your employer in operating a public fund declared by the Treasurer to be a developing country relief fund, or a public fund established and maintained to provide monetary relief to people in a developing foreign country that has experienced a disaster (a public disaster relief fund)

· activities of your employer as a prescribed charitable or religious institution exempt from Australian income tax because it is located outside Australia or the institution is pursuing objectives outside Australia

· deployment outside Australia by an Australian government (or an authority thereof) as a member of a disciplined force.

In your case:

· You are employed by Employer A as staff in Country A

· You have worked continuously overseas for a period greater than 91 days

· Your foreign service is not directly attributable to any of the conditions specified in 23AG (1AA) of the ITAA 1936.

Therefore, your foreign earnings are not eligible for exemption pursuant to section 23AG of the ITAA 1936.

Consequently, your income will not be exempt from Australian income tax under section 23AG of the ITAA 1936 and is assessable under subsection 6-5(2) of the ITAA 1997.

Tax treaty with Country A

In determining liability to Australian tax of foreign-source income received by a resident, 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).

A particular schedule to the Agreements Act contains the tax treaty between Australia and Country A and the Notes to the agreement (the Country A Convention).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 and Income Tax Assessment Act 1997 so that those Acts are read as one.

The Country A Convention operates to avoid the double taxation of income received by Australian and Country A residents.

A specific Article of the Country A Convention provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of employment shall be taxable only in Australia, unless the employment is exercised in Country A. If the employment is exercised in Country A, such remuneration as is derived from that exercise may be taxed in Country A.

A specific Article of the Country A Convention provides that Country A tax paid under Country A law and in accordance with the Convention in respect of income derived by an Australian resident from sources in Country A shall be allowed as a credit against Australian tax payable in respect of that income.

Foreign Income Tax Offset

A Foreign Income Tax Offset (FITO) is a non-refundable tax offset that reduces the Australian tax that would be payable on foreign income which has been subjected to foreign income tax by an amount equal to the foreign income tax paid.

The Explanatory Memorandum, Tax Laws Amendment (2009 Budget Measures No.1) Act 2009 provides that foreign employment income that is not exempt under the new rules may be subject to Australian income tax.

In such cases, taxpayers will be eligible to claim a non-refundable foreign income tax offset (FITO) for foreign income tax paid on that income. This will relieve double taxation for those individuals.

The FITO rules apply to income years beginning on or after 1 July 2008 and are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).

The FITO rules replaced the former foreign tax credit system and were designed to provide taxpayers with a simplified way of claiming relief for foreign income taxes paid on amounts included in their assessable income in Australia.

In your case:

As you are an Australian resident, the income that you earn in Country A is assessable and will need to be included in your income tax return.

Further issues for you to consider

ATO view documents

Taxation Ruling IT 2650

Taxation Ruling TR 96/15