Edited version of private ruling

Authorisation Number: 1011866667988

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Ruling

Subject: Residency for tax purposes

Question:

Are you a resident of Australia for taxation purposes while working in Country X?

Answer:

No

This ruling applies for the following periods:

Year ending 30 June 2012

Year ending 30 June 2013

Year ending 30 June 2014

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You were born in Australia and you are an Australian citizen.

You are currently employed by a public company based in Australia.

You applied for three years leave without pay. You wanted to work for a company in Country X during this period. You have recently accepted a position for three years with this company.

You have a work visa for Country X.

While on leave you will continue to accrue long service leave and your former Australian employer will continue to pay superannuation contributions to you. They have also assisted with your relocation costs to Country X.

You have sold your home in Australia and shipped your possessions to Country X, where you wish to reside for the next three years.

You do not have any other assets in Australia other than a joint bank account with your spouse.

You have cancelled your private health insurance.

Your spouse and your children have accompanied you to Country X.

Your children will attend school while living in Country X.

You and your family will rent a home in Country X.

You will operate a bank account in Country X.

You and your family will return to Australia every year for your annual holidays.

You intend to return to Australia in three years time and resume your role with your Australian employer and purchase another home for you and your family to live in.

You and your spouse have never worked for the Commonwealth Government of Australia.

You have no social or sporting connections with Country X.

Reasons for decision

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 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 meet 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. 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'.

Although the question of whether a person resides in a particular country is a question of fact, the courts have referred to and taken into account various factors considered to be relevant. These are:

· whether the person is physically present in that country at some time during the year of income

· the history of the person's residence and movements

· if the person is a visitor to the country, the frequency, regularity, duration and purpose of the visits

· if the person is outside the country for part of the relevant income year, the purpose of the absences

· the family and business ties which the person has with the particular country, and

· whether a place of abode is maintained by the person in the relevant country or is available for his or her use while there.

Taxation Ruling IT 2650 emphasises the intended and actual length of the individual's stay in an overseas country, any intention to return to Australia or travel elsewhere, the establishment or abandonment of any residence, and the durability of association that the individual maintains with a particular place in Australia as the main factors to be considered when determining the residency status of individuals leaving Australia.

You intend to stay in Country X for three years. You and your family are renting a place in Country X and your children attend school there. As you are living in Country X you are not considered to be residing in Australia.

Therefore, you are not a resident of Australia under this test.

The domicile test

Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia.

Domicile

Domicile is a legal concept, determined according to the Domicile Act 1982 and common law rules established by private international law cases.

Domicile is the place that is considered by law to be your permanent home. It is usually something more than a place of residence.

Your domicile is Australia because you were born in Australia and you are an Australian citizen.

Permanent place of abode

It is clear from the case law that a person's permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case.

The courts have considered a person's 'place of abode' is where they consider 'home'. In R v Hammond (1982) ER 1477, Lord Campbell CJ stated that "a man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression."

A place of abode must exhibit the attributes of a place of residence or a place to live, as contrasted with the overnight, weekly or monthly accommodation of a traveller.

Paragraph 23 of IT 2650 sets out the following factors which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode:

(g) the intended and actual length of the taxpayer's stay in the overseas country;

(h) whether the taxpayer 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;

(i) whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

(j) whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

(k) the duration and continuity of the taxpayer's presence in the overseas country; and

(l) the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

In relation to the weight to be given to each of the above factors, paragraph 24 of IT 2650 states:

The weight to be given to each factor will vary with the individual circumstances of each particular case and no single factor will be decisive… however… greater weight should be given to factors (c), (e) and (f) than to the remaining factors, though these are still, of course, relevant.

Although you have no intention of settling permanently in Country X, you have a three year work contract with a company based in Country X. You and your family will be renting a place in Country X during this time. The Commissioner is satisfied that you have established a permanent place of abode outside of Australia.

Therefore, you are not a resident of Australia under this test.

The 183 day test

Under the 183 day test, a person is a resident of Australia if they are actually physically present in Australia for more than 183 days in an income year unless the Commissioner is satisfied that their usual permanent place of abode is outside of Australia and they have no intention of taking up residence here.

In your case you will not be physically present in Australia for more than 183 days during your stay in Country X.

Therefore, you are not a resident of Australia under this test.

The superannuation test

A person will be considered a resident under the Commonwealth superannuation fund test if they currently contribute to certain superannuation funds for Commonwealth government employees. The eligible funds are funds:

· established under the Superannuation Act 1976 (such as the Commonwealth Superannuation Scheme), or

· established under the Superannuation Act 1990 (such as the Public Sector Superannuation Scheme), or

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

In your case, neither you, nor your spouse, have ever been Commonwealth government employees and therefore you are not able to contribute to the above mentioned superannuation schemes.

Therefore, you are not a resident of Australia under this test.

Your residency status

As you do not meet any of the above tests, you are not a resident of Australia for tax purposes.

As you are not a resident of Australia, according to section 6-5 of the ITAA 1997, your assessable income only includes income gained from sources in Australia.

Further information

Capital gains tax (CGT) and ceasing to be an Australian resident

If a taxpayer ceases to be an Australian resident, a CGT event may be triggered. The relevant CGT event for an individual or company ceasing to be an Australian resident is CGT event I1.

If a taxpayer ceases to be an Australian resident, he or she is taken to have disposed of all of his or her assets (except those that are taxable Australian property):

· at the time the taxpayer ceases to be a resident, and

· for their market value at that time.

These provisions effectively crystallise any unrealised gains or losses the taxpayer has earned at the time the taxpayer stops being an Australian resident on assets that are leaving the Australian tax net, and subject them to Australian tax. This ensures that a taxpayer cannot avoid CGT on these unrealised gains when he or she ceases to be an Australian resident.

On the other hand, assets that are taxable Australian property remain subject to Australian tax after a taxpayer ceases to be an Australian resident. Consequently, there is no deemed disposal of such assets at the residence-change time.

CGT event I1 can place financial hardship on individual taxpayers, who have not physically disposed of an asset at the time the CGT event occurs, but who nevertheless have to fund a tax bill on the deemed disposal. It would be difficult for many individuals to fund this cost until they have actually disposed of the asset in question.

To alleviate this hardship, an individual taxpayer may choose to defer CGT event I1.

If a taxpayer makes this choice, the taxation of the unrealised capital gain or loss is only deferred. It is not permanently disregarded. The gain will be subject to tax when the taxpayer actually disposes of the relevant asset (and therefore have the funds to meet any tax liability).

Subsection 104-165(2) of the ITAA 1997 achieves this result by deeming the relevant asset to have the necessary connection with Australia until such time as another CGT event happens in relation to the asset or the taxpayer once again becomes an Australian resident (whichever occurs first).