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Ruling

Subject: Residence of individual

RESIDENCY STATUS

QUESTION 1

Summary

You are considered to be a non-resident for Australian income tax purposes.

Detailed reasoning

Residency

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; and

· 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.

Where one or more of the above tests is satisfied, a taxpayer will be deemed to be an Australian resident for tax purposes.

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 in Country X for a period of two years, you are not considered to be residing in Australia.

The domicile test

Under the domicile test, a person will be considered an Australian resident if they are considered to have their domicile in Australia, unless the Commissioner is satisfied they have a permanent place of abode outside Australia.

Generally, persons leaving Australia temporarily would be considered to have maintained their Australian domicile unless it is established 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.

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.

Taxation Ruling IT 2650 provides assistance in determining a person's permanent place of abode. It is a question of fact which must be determined on a case by case basis.

Paragraph 5 of IT 2650 identifies some of the factors considered to be relevant in determining a person's place of abode:

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

· whether the individual 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;

· the establishment of a home (in the sense of a dwelling place; a hour or other shelter that is the fixed residence of a person, a family or a household) outside Australia;

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

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

· the durability of association that the individual has with a particular place in Australia, for example, maintaining bank accounts in Australia, informing government departments that he or she is leaving permanently, place of education of his or her children, family ties, etc.

In your case, you have been living in Country X during the 2010-2011 financial year. You are contracted to work for the Australian embassy in Country X under a 2 year renewable contract during the 2010-2011 and 2011-2012 financial years.

You have established a home outside Australia and you have no intention of returning to Australia as your partner lives in Country X.

Based on these facts, it is considered that you have established a permanent place of abode overseas for the 2010-11 and 2011-12 financial years.

Therefore, you are considered to be an Australian non-resident for tax purposes under the domicile test outlined in subsection 6(1) of the ITAA 1936 for the period between 1 July 2010 and 30 June 2012.

The 183-day test

This test will not be applied to your circumstances as it has been identified that your permanent place of abode is outside Australia.

The superannuation test

An individual is still considered an Australian resident if that person is eligible to contribute to the Public Service Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS), or that person is the spouse or child under 16 of such a person.

A person is a 'resident' under this test if they are:

· a member of the superannuation scheme established by deed under the Superannuation Act 1990 (SA 1990);

· an eligible employee for the purposes of the Superannuation Act 1976 (SA 1976), or

· the spouse or a child under 16, of a person covered by either of the above.

The SA 1990 established the PSS, and the SA 1976 established a scheme called the Commonwealth Superannuation Scheme (CSS).

To determine whether a person is a resident under the Commonwealth superannuation fund test, it is necessary to determine whether the person is a member of the superannuation scheme (PSS) for the purposes of the SA 1990 for that period.

A "member" of the superannuation scheme is defined in section 6(1) of the SA 1990 to mean a person who is a "permanent employee". A "permanent employee" is defined in section 3 of the SA 1990 as:

…a person employed in a permanent capacity by the Commonwealth or by an approved authority, but does not include a person who is engaged or appointed for employment outside Australia only…

In your case, you are employed in a permanent capacity. You are engaged or appointed for employment only outside Australia (namely, Country X). Therefore, you are not a "permanent employee" for the purposes of the definition of "member" in paragraph 6(1)(a) of the SA 1990.

Therefore, you are not considered to be an Australian resident for tax purposes under the superannuation test.

Conclusion

You are considered to be a non-resident for Australian income tax purposes under the residency tests.

QUESTION 2

Summary

The employment income you earn from the Australian embassy in Country X is assessable in Australia.

Detailed reasoning

Double tax agreement (dta)

In determining a foreign resident's liability to Australian tax, it is necessary to consider the tax treaty between Australia and Country X.

The DTA between the Government of Australia and the Government of Country X for the Avoidance of Double taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income contains the agreement between Australia and Country X for the avoidance of double taxation.

In particular, a specific article of the DTA provides that remuneration paid in respect of labour or personal services performed as an employee of a government (including a State or local government) of Australia in the discharge of governmental functions to a citizen of Australia will be taxable only in Australia. The remuneration is exempt from tax in Country X. This does not include a situation where the individual is a resident of Country X and is not an Australian citizen, in which case, the remuneration will be taxable in Country X and not Australia.

This means that in the case of an Australian citizen who is employed in Country X by the Australian government (i.e. working in embassies and consulates), Australia has the sole taxing right to the remuneration. As such, these earnings are subject to tax in Australia and need to be included as assessable foreign salary and wage income in your Australian tax returns.

As you are an Australian citizen and the salary or wages paid to you are remuneration paid by the public sector organisation (namely, the Australian embassy) for services rendered to it in the discharge of governmental functions, the salary or wages shall be exempt from tax in Country X.

The fact that you are engaged as a locally engaged staff (LES) does not alter the decision in your case. You are an Australian citizen who moved to the Country X for the purpose of taking up this position at the Australian embassy. Consequently, the remuneration you receive is taxable in Australia.

Therefore, the specific article of the DTA allocates to Australia the right to tax the salary or wages paid to you.

Source of income

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a non-resident taxpayer includes ordinary income derived directly or indirectly from Australian sources.

Accordingly, the salary or wages derived by you from your employment in the Country X with a public sector organisation are included in your assessable income under subsection 6-5(3) of the ITAA 1997 as the following conditions are satisfied:

· the salary or wages are ordinary income;

· you are a foreign resident; and

· by operation of a specific article of the DTA, the salary or wages have been derived by you from Australian sources.