Edited version of private ruling

Authorisation Number: 1011803258685

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Residency and deductions

Questions and answers:

1. Are you a resident of Australia for taxation purposes while you are on secondment in another country?

Yes.

2. Will the allowances you receive in another country be included in your assessable income?

Yes.

3. Are you entitled to claim deductions, up to the reasonable limits for travel allowance expense amounts set by the Commissioner, against the allowance you receive?

No.

This ruling applies for the following period:

1 July 2010 to 30 June 2011.

The scheme commenced on:

1 July 2010.

Relevant facts:

You were born overseas and are a citizen of a foreign country.

You became an Australian citizen.

You do not have a spouse or any children.

You are currently employed and paid by an Australian company.

You have been working in another country on secondment from your Australian employer.

While on secondment you are working a number of weeks on/lesser number of weeks off.

Depending on what personal affairs you need to attend to, you either return to Australia during your lesser number of weeks off to take care of personal business, visit friends for rest and recuperation, or you holiday elsewhere.

When you return to Australia during your lesser number of weeks off you stayed at hotels and with friends.

You do not intend to reside overseas permanently.

You will return to Australia in 2011 when your secondment ceases.

You took a small number of personal belongings with you to the other country. You placed your other personal belongings in storage in Australia and rented out your home.

Your other Australian assets include investment properties, a car and a bank account.

You have a bank account in the foreign country of which you are a citizen.

You have maintained your membership of a sporting organisation in Australia.

You compete in local sporting events in the other country.

You are provided with an apartment in the other country which you are not required to make any contribution towards.

You do not share your apartment in the other country with other people.

You purchase and prepare your own food in the other country.

Your secondment agreement specifies your remuneration in the other country includes salary and a site allowance provided to cover meals and incidentals, such as phone calls and other minor expenses, while you are on site.

The site allowance will not be separately disclosed as an allowance on the payment summary you will get from your employer at the end of the financial year.

Rather, your employer has told you your payment summary will only be one line containing a lump sum figure totalling all earnings.

You are paying tax in the other country.

Relevant legislative provisions:

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

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Section 8-1.

Income Tax Assessment Act 1997 Section 10-5.

Income Tax Assessment Act 1997 Section 15-2.

Income Tax Assessment Act 1997 Division 900.

Income Tax Rates Act 1986 Schedule 7.

International Tax Agreements Act 1953

Reasons for decision

Residency

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as 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:

· the resides test,

· the domicile and permanent place of abode test,

· the 183 day test, and

· the superannuation test.

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual. If residency is established under the resides test, the remaining three tests do not need to be considered.

If residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test

The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'.

The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia specifies that a person's place of abode is where they live.

You left Australia to work in the other country on secondment and you will remain in the other country until 2011. Your employer provides you with accommodation in the other country. As you are living in the other country, this is where your place of abode is. Accordingly, you have not been a resident of Australia for taxation purposes under this test since you left Australia to work in the other country.

The domicile and permanent place of abode test

Under this test, a person whose domicile is in Australia will be considered a resident of Australia for taxation purposes, unless the Commissioner is satisfied the person's permanent place of abode is outside Australia.

A person's domicile is generally their country of birth. This is known as a person's domicile of origin. A person's domicile of origin will not usually change but can in some circumstances. For example, a person can acquire a domicile in another country by choice.

In order to acquire a domicile by choice outside of their domicile of origin, a person must have and be able to prove an intention to make their home indefinitely in a country outside their domicile of origin. Sufficient proof of such an intention is considered to exist in cases where a person becomes a citizen of a country outside of their domicile of origin.

Taxation Ruling IT 2650 (which contains the Australian Taxation Office (ATO) view on whether individuals who leave Australia temporarily cease to be Australian residents for income tax purposes) specifies that a person with an Australian domicile who is living outside Australia will retain their Australian domicile if they intend to return to Australia on a 'clearly foreseen and reasonably anticipated contingency' - at the end of a specific period for example.

In your case, your domicile of origin is not Australia but you obtained an Australian domicile by choice when you became an Australian citizen. You will maintain your Australian domicile while you are working in the other country because you intend to return to Australia at the end of your secondment.

As a result, you will be a resident of Australia for taxation purposes under the domicile and permanent place of abode test unless the Commissioner is satisfied your permanent place of abode is outside Australia.

IT 2650 specifies that a permanent place of abode does not have to be everlasting or forever and does not mean an abode in which a person intends to live for the rest of their lives. However, the establishment of a place of residence in another country does not necessarily mean that place will be considered to be a taxpayer's permanent place of abode.

IT 2650 specifies that a person's permanent place of abode is a question of fact to be determined in the light of all the circumstances of each case.

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

· the intended and actual length of a taxpayer's stay in another country (a period in excess of two years is generally considered sufficient to support the establishment of a permanent place of abode in another country but must still be considered in light of the other facts),

· the intention of the taxpayer (for example, whether the taxpayer intended return to Australia at a definite point in time),

· whether the taxpayer has established a home outside Australia,

· whether any residence or place of abode exists in Australia or has been abandoned because of the taxpayer's overseas absence,

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

· the durability of association that the taxpayer has with Australia.

In your case, we do not consider that you established a permanent place of abode in the other country because:

· You will return to Australia after a period of about 12 months.

· While you have a place to reside in the other country, we do not consider that you have established your own home there. Rather, you are living in accommodation paid for by your employer for the duration of your secondment.

· You cannot be said to have abandoned your Australian residence. Instead, you have rented out that residence in your absence and placed the majority of your personal belongings in storage.

· Apart from your Australian residence which is rented out, your other Australian assets include three investment properties, a car and a bank account which your wages are paid into. You also travel back to Australia to take care of personal business, visit friends and for rest and recuperation. Accordingly, we consider the durability of your association with Australia is greater than the durability of your association with the other country.

You are a resident of Australia for taxation purposes under the domicile and permanent place of abode test because you have an Australian domicile and you have not established a permanent place of abode outside of Australia.

Assessable income of Australian resident taxpayers

Under the provisions of the ITAA 1997, the assessable income of a resident taxpayer includes the ordinary and statutory income they derive from all sources, whether in or out of Australia, during the income year.

Salary and wages are ordinary income and are included in your assessable income by section 6-5 of the ITAA 1997.

Allowances are a form of statutory income and are included in your assessable income under the provisions of section 15-2 of the ITAA 1997.

Double tax agreement with the other country

In determining liability to Australian tax on foreign sourced income received by a person who is resident of Australia for taxation purposes, it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one. In the event of inconsistent provisions, the Agreements Act overrides the ITAA 1936 and ITAA 1997 (except in some limited situations).

Schedule XX to the Agreements Act contains the agreement between Australia and the other country (the Convention). The Convention operates to avoid the double taxation of income received by residents of Australia and the other country.

Article x(a) of the Convention provides that salary, wages and other similar remuneration (allowances for example) derived by an individual who is a resident of Australia in respect of an employment will be taxable only in Australia unless the employment is exercised in the other country. If the employment is exercised in the other country the remuneration may be taxed in the other country.

Article x(b) of the Convention provides that remuneration derived by an Australian resident individual taxpayer in respect of an employment exercised in the other country will be taxable only in Australia if:

· the taxpayer is present in the other country for a period or periods not exceeding a total of 183 days in the year of income,

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

· the remuneration is not deductible in determining the taxable profits of a permanent establishment or fixed base which the employer has in the other country.

In your case, your time in the other country will exceed 183 days so the provisions of Article x(b) of the Convention do not apply. Accordingly, as a resident of Australia for taxation purposes, your assessable income in Australia will include the total of your salary/wages and all allowances you were paid in the other country. It may also be taxed in the other country under Article x(a) of the Convention.

Tax rates

The rates of tax applicable to individual taxpayers who are residents of Australia for taxation purposes are prescribed by law in Schedule 7 of the Income Tax Rates Act 1986.

The following rates are applicable for individuals who are residents of Australia for tax purposes in the 2010-11 income tax year:

Deductions against allowances - general

The fact that an allowance is included in your assessable income does not automatically entitle you to claim a deduction against that allowance.

Regardless of the reason an allowance is paid, a deduction against it will only be allowed if an expense:

· is actually incurred,

· meets the deductibility tests in section 8-1 of the ITAA 1997, and

· satisfies the substantiation rules.

Under the provisions of section 8-1 of the ITAA 1997, deductions are allowed for all losses and outgoings incurred in gaining or producing your assessable income, except where the outgoings are capital, private or domestic in nature.

Where the deductibility tests under section 8-1 of the ITAA 1997 are met, the general substantiation requirement is that a taxpayer must keep written evidence of any expense for which a deduction is claimed. This will be the case unless an exception from the normal substantiation requirements exists.

Exception from substantiation for reasonable travel allowance expenses

An exception from substantiation is available in cases where the Commissioner considers deductions claimed for a travel allowance expense are within the reasonable limits (set annually by the Commissioner) for the travel covered by the allowance.

The reasonable limits set by the Commissioner for the 2009-10 income year are published in Taxation Determination TD 2009/15 What are the reasonable travel and overtime meal allowance expense amounts for 2009-10 income year? and, in the case of overseas travel, can apply to costs for food or drink and losses or outgoings that are incidental to the travel.

The ATO view on the application of the substantiation exception for reasonable travel allowance expenses is contained in Taxation Ruling TR 2004/6 Income Tax: substantiation exception for reasonable travel and overtime meal allowance expenses.

Taxation Ruling TR 2004/6 specifies that for the exception from substantiation to apply to reasonable travel allowance expenses, an amount paid to an employee to cover those expenses must qualify as a travel allowance. If the amount paid does not qualify as a travel allowance, the exception from substantiation for reasonable travel allowance expenses does not apply.

TR 2004/6 specifies the conditions that must be met for an allowance to qualify as a travel allowance. One of these conditions is that the amount must be paid as an allowance. In relation to whether or not an amount paid to an employee is paid as an allowance, paragraph 59 of TR 2004/6 specifies that:

· an amount paid for travel expenses that has been 'folded-in' as part of an employee's normal salary or wages is not considered to be an allowance, and

· if an allowance has been folded-in as part of normal salary or wages, the exception from substantiation provisions do not apply and the necessary written evidence must be kept to support any claims for deductible expenses incurred.

In your case, your employer pays you a site allowance, to cover the cost of food and incidentals, such as phone calls, while you are working on site during your secondment in the other country.

The site allowance will not be separately disclosed as an allowance in your annual payment summary. Rather, your employer has told you your payment summary will only contain a lump sum figure totalling all earnings for the year.

As a result, the site allowance does not qualify as a travel allowance. Therefore, any expenses against the allowance (regardless of whether or not they meet the deductibility tests) are not travel allowance expenses and you will not be entitled to deductions up to the reasonable amounts set by the Commissioner for any expenditure against the site allowance.

You may be entitled to some work related deductions where you can show there is a connection (nexus) between the outgoing and the earning of your assessable income and the expenses meet the other tests of deductibility under section 8-1 of the ITAA 1997: that is, they are not capital, private or domestic in nature. In this regard:

· The cost of meals eaten during a normal working day are not deductible. These costs are private in nature and lack the necessary connection to the earning of your assessable income.

· Phone calls and other incidental expenses that are either private or domestic in nature are also not deductible.

Where you have expenses that meet the deductibility tests under section 8-1 of the ITAA 1997, you will need to ensure you are also able to meet substantiation requirements.

Conclusion

You remain a resident of Australia for taxation purposes while on secondment in the other country.

You assessable income in Australia will include the value of all allowances paid to you by your employer while you are working in the other country.

You are not entitled to deductions against the site allowance up to the reasonable travel amounts set by the Commissioner.