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Ruling

Subject: Residency and assessability of foreign salary and wages

Question and answer:

Is the income you receive from your employment with a foreign company assessable in Australia?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012

Year ended 30 June 2013

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are an Australian citizen.

Your country of origin is Australia.

Shortly after your child's birth you and your spouse moved to reside in country X.

You hold an Immigration country X "Non-Imm" multiple re-entry permit and a country X Work Permit which allow you to reside in country X and do business there.

Although you spend more time in country X than Australia, you have not obtained country X citizenship and it is rare for a non-national to adopt country X citizenship.

You are presently employed under contract by the foreign company in country X. Your contract is extended yearly.

You work on a rotating roster of six weeks on and six weeks off.

All work in relation to your employment with the foreign company in country X is performed in country X.

You do not carry out any of your work in Australia.

In the income year ended 30 June 2010 you spent over 183 days in country X.

You expect to spend a similar amount of time in country X during the current financial year.

Since you first commenced working in country X you have spent over 50% of your time there.

Your spouse is a country X national and citizen. She has gained permanent residence in Australia.

Your child was born in Australia and is entitled to country X citizenship.

For the past several years, since your child started school, your spouse and child reside in Australia during school terms, for the purpose of allowing your child to attend school in Australia.

Outside of school terms your spouse and child generally reside with you in country X whilst you are working.

You have purchased properties both in country X and Australia.

You purchased the property in country X before you purchased your home in Australia with your funds, but the property is held in your spouse's name due to difficulties associated with foreign ownership in country X at the time of purchase.

You reside in the country X property whilst working in country X.

You spouse and child reside in the Australian property at which you also stay when you return to Australia to visit them.

Neither you nor your spouse have ever been employed by the Commonwealth Government of Australia.

You are not members of the CSS or the PSS.

You are over 16 years of age.

You do not have regular dental or health check ups in Australia.

You have regular dental and medical check ups in country X.

You and your spouse maintain an average bank balance in a joint Australian bank account.

Interest earned from bank accounts in Australia is negligible.

You are the trustee of a testamentary trust following the death of your parent. You, your spouse and your child are beneficiaries of this trust. The investments in the trust are substantial.

You transfer money that you have earned from your personal income to Australia to cover your family and your living expenses in Australia.

There is no intention to transfer personal income to Australia for investment purposes.

You have an Australian credit card.

You have a country X credit card with a limit higher than the Australian credit card limit.

You do not have any loans either in Australia or country X.

Ties with Australia

You have family that live in Australia and you see them regularly each year.

You maintain social friends in Australia.

You are not a member of a gym in Australia.

When you are in Australia you occasionally play golf with friends.

You have a family tennis membership at which you play approximately twice a week when in Australia.

There are no regular social occasions organised while you are in Australia.

You and your spouse have shares and bank accounts in Australia.

Ties with country X

All your spouse's family reside in country X and you see them regularly each year.

You maintain social and working friends in country X.

You are a member of a gym in country X.

You play tennis with your company once a week when in country X.

You play golf once a fortnight at golf courses when you are in country X.

In the event of your death it is likely that your spouse and child would reside in country X.

You have a bank account in country X.

Days spent in each country

You have provided a break down of the number of days you have spent in Australia and country X since the 2008-09 financial year.

For the years ending 30 June 2012 and 30 June 2013 you anticipate that the period spent in your country X residence compared to your Australian residence will be similar to the figures set out in your previous ruling for the preceding 3 financial years.

Vacations

You have provided information regarding where you have spent your vacations.

There is a tax treaty between Australia and country X.

You have supplied information from the Revenue Department of country X that states that a "resident" means any person residing in country X for a period or periods aggregating more than 180 days in any tax (calendar) year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Division 770

Income Tax Assessment Act 1997 Subsection 995-1

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Schedule 30

International Tax Agreements Act 1953 Schedule 30-Art 4

International Tax Agreements Act 1953 Schedule 30-Art 15

International Tax Agreements Act 1953 Schedule 30-Art 24

Reasons for decision

Assessability of foreign salary and wage income

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that where you are a resident of Australia for taxation purposes, your assessable income will include ordinary income derived from all sources, whether inside or outside of Australia.

Salary and wages are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997. Subsections 6-20(1) and (2) explain that such income will not be taxable in Australia if another provision of the ITAA 1997 or the Income Tax Assessment Act 1936 (ITAA 1936) makes it exempt from tax.

However, to determine whether the income you receive as a consequence of your employment with the foreign company is assessable in Australia, we must first establish your residency status.

Residency

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936 and section 995-1 of the ITAA 1997. The definition contains four tests which will help us ascertain whether you are a resident of Australia for income tax purposes from when you departed Australia to work overseas. These tests are:

(i)   residence according to ordinary concepts;

(ii)  the domicile/permanent place of abode test;

(iii)   the 183 day/usual place of abode test; and

(iv)   the Commonwealth superannuation test.

The primary test for deciding your residency status is whether you reside in Australia according to the ordinary meaning of the word resides.  Note, however that where it is found that you have not been residing in Australia according to ordinary concepts, you may still be a resident of Australia for tax purposes if you satisfy the conditions of one of the other three tests.

There have been several court cases where residence according to ordinary concepts has been examined in detail. Overall it has been established that residence includes two elements: physical presence in a particular place and the intention to treat the place as home, at least for the time being, not necessarily forever.

In Joachim v FCT [2002] ATC 2008, physical presence was determined to include whether or not the person has retained a continuity of association with a place, together with an intention to return to that place and an attitude that the place remains home.

Early English case law also placed a great deal of emphasis on the maintenance of a place of abode. In IR Commrs v Brown (1926) 11 TC 292, the giving up by the taxpayer of his house in the United Kingdom appeared to be the decisive factor in the finding that he was not resident in the United Kingdom; in earlier years when he maintained the house he was held to be resident despite spending most of his time abroad. Lloyd v Sulley (1884) 2 TC 37; In re Young (1875) 1 TC 57; Rogers v IR Commrs (1879) 1 TC 225; Thomchild v Bensted (1918) 7 TC 137 and Peel v IR Commrs (1928) 13 TC 443 are all cases in which the taxpayer had a residence available in the United Kingdom and was held to be resident there.

In a recent case Iyengar and Commissioner of Taxation [2011] AATA 856 (30 November 2011) (Iyengar's case) the AAT found the individual was a resident of Australia under the resides test because of his continuity of association with Australia by maintaining his jointly owned home in Australia and the fact that this spouse remained in that home in Australia.

In reaching its conclusion the Tribunal considered the following factors:

Physical presence

§ his family remained in Australia;

§ he transferred his employment income to Australia to pay his mortgage;

§ he returned to his home in Australia during holidays;

§ he retained most of his personal items in Australia;

§ his temporary and fixed employment contract (2 years); and

§ he did not purchase any substantial items of personal property whilst overseas.

Nationality

Ordinarily, the nationality of an individual does not weigh significantly in deciding the residency status of an individual. However, in borderline cases, this factor may play a role.

In Iyengar's case the taxpayer and his family became Australian citizens in June 2003.

Maintenance of a place of abode

In Iyengar's case the taxpayer maintained a place of abode in Australia, being his family home, whilst he was employed overseas. The taxpayer also left behind in Australia some of his personal items, such as two motor vehicles, furniture and appliances, clothing and other household items. These factors were found to be indicative of him remaining an Australian resident.

Family and business ties with a country

Case law has established that the family or business ties that an individual retains with a country are relevant in determining whether an individual has remained or ceased to be a resident.

In Iyengar's case the following ties that the taxpayer had with Australia were such that he remained a resident of Australia:

§ his family remaining in Australia (except for the short trip to Dubai by his spouse);

§ he maintained his family home in Australia;

§ he used all his foreign income to make additional payments on his mortgage; and

§ his holidays in Australia were spent at his family home.

Application to your circumstances

You left Australia several years ago to live and work in country X. You have worked for two country X employers during this time and you continue to work for the second employer in country X. Your employment contract is for one year and you extend your contract at the end of each period. You work on a rotating roster and your present working arrangements require you to work 6 weeks on, 6 weeks off, which can be adjusted if required. You have a permanent home in country X that is in your spouse's name.

Throughout this entire period you have maintained joint ownership of your home in Australia. Your spouse and your child live in that home while your child attends school in Australia. You also return to this home when you visit your family while they are in Australia.

Your circumstances are slightly different to those in Iyengar's case where his employer provided his accommodation overseas. You have purchased a home in country X in your spouse's name. Iyengar also made the comment that he had it in his mind that he would return to Australia upon completion of the contract.

Despite Iyengar's limited physical presence in Australia in the relevant income years, it was determined from the evidence that he not only maintained his residence in Australia he also retained a continuity of association with Australia, together with an intention to return to Australia upon completion of his contract and, further, that he had an attitude that the home in Australia at all material times remained his "family home".

You have stated that you have no intention to return to Australia on a permanent basis. In addition you state that in the event of your death, or that of your spouse or child, it is likely the remaining immediate family would not reside in Australia. You spend most of each year in country X and only return to Australia when your spouse and child are there during school term times to visit.

Result of residence according to ordinary concepts test

Based on decisions made in past cases you remain a resident of Australia for taxation purposes under this test due to your continuity of association with Australia by maintaining your family home in Australia and returning to live in that home when you are in Australia with your family.

As stated previously, the residence according to ordinary concepts test is the primary test and under normal circumstances it is not necessary to examine the other tests. In your case, however, we will continue to consider your circumstances as they apply to the remaining tests.

The domicile and permanent place of abode test

If a person has their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside Australia.

There are essentially 3 types of domicile that an individual can have:

§ the domicile of origin;

§ the domicile of choice; and

§ the domicile of dependency.

Basically your domicile of origin is where you were born, being the country of your father's permanent home. You retain your domicile of origin until you adopt a new domicile of choice or a new domicile results from the operation of law. As you are an Australian citizen, your domicile is in Australia.

In order to show that you have chosen a new domicile of choice, you must be able prove an intention to make your home indefinitely in another country, such as applying for citizenship in that country. You state that although you spend more time in country X than Australia you have not obtained country X citizenship; it is rare for a non-national to adopt country X citizenship.

In relation to domicile of dependency, such a domicile will normally only exist in relation to minors or individuals who are of unsound mind.

Income Tax Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia explains that in determining a person's domicile it is necessary to consider your intention as to the country in which you are to make your home indefinitely. Thus, a person with an Australian domicile but living outside Australia will retain that domicile if he or she intends to return to Australia on a clearly foreseen and reasonably anticipated contingency.

You have a dominance of presence in country X however you are maintaining your links with Australia and regularly return to your jointly owned home. You earn income from Australian shares and funds in a joint bank account with your spouse. You are trustee of a testamentary trust after the death of your parent and you, your spouse and your child are beneficiaries of this trust.

Your spouse and your child live in Australia during school terms and you transfer money to your Australian bank account to cover their living expenses while in Australia. Your spouse and child come to country X to be with you, or you unite for a family holiday elsewhere during school holiday periods.

You state that you have no intention of residing in Australia on a permanent basis or to work in Australia. You return to Australia for the purpose of visiting family and friends while you are off work. In addition, you advise that in the event of your death it is likely your spouse and your child will reside in country X as their personal relations and family support are closer there. In the event of your death and your spouse's death your child would reside in country X and be supported by your spouse's family. In the event of your spouse's death it is likely that you and your child would predominantly reside in country X.

Results of the domicile test

In considering your circumstances it cannot be said with complete certainty that you have abandoned your domicile in Australia and taken up a new domicile of choice in country X.

Permanent place of abode

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.

You and your spouse have purchased a home in country X where you live on your own while you are working in country X. Your spouse and child live in this home when they are in country X, usually during school holidays. Alternatively, when you are not working you return to your Australian home.

The majority of time you are with your family is either when you return to Australia and stay in your Australian home or when you are on holidays together either in Australia or elsewhere. For this reason, even though you have a permanent residence in country X, the Commissioner's view is that your place of abode is where you live with your family and this is predominantly in Australia.

Results of the domicile and permanent place of abode test

You have retained your domicile in Australia as you are an Australian citizen and you have not applied for residency in country X. It is noted that a non-national rarely adopts country X citizenship and your country X visa enables you to live and work in country X.

You have an abode in country X where you live when working in country X. In addition, your family lives with you in this abode during school holiday periods.

You have maintained your family home in Australia and from arguments outlined in the Iyengar case, the fact that your spouse and your child remain in your family home in Australia during school terms, and you return to your family home when you are in Australia, is a determinative factor.

The Commissioner is of the opinion that although you have an abode in country X, the place where you live with your family for the majority of the time is at your abode in Australia. Therefore you have not established a permanent place of abode outside Australia in accordance with the meaning contained within the legislation.

You are a resident of Australia for taxation purposes under this test.

The 183 day test

Under the 183-day test, a person will be an Australian resident if they are present in Australia for 183 days during the year of income unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

Since leaving you have not returned to Australia for more than 183 days in any one financial year.

Results of the 183 day test

You are not a resident of Australia for taxation purposes under this test.

The superannuation test

An individual is still considered to be a resident if that person is or has been employed by the Commonwealth Government of Australia and is therefore eligible to contribute to the Commonwealth Superannuation Scheme (CSS) or Public Service Superannuation Scheme (PSS), or that person is the spouse or child under 16 of such a person.

Results of the superannuation test

In your case, neither you nor your spouse have ever been employed by the Commonwealth Government of Australia. You are not members of the CSS or the PSS and you are over 16 years of age.

You are not a resident of Australia for taxation purposes under this test.

Conclusion of residency

You are a resident of Australia for taxation purposes.

There are two provisions that would make your salary and wages exempt from income tax:

1. Section 23AG of the ITAA 1936

Foreign earnings derived by a limited category of Australian resident individuals engaged in service in a foreign country for a continuous period of not fewer than 91 days are exempt from Australian tax under section 23AG of the ITAA 1936.

The exemption is restricted to certain aid workers, charitable workers and government employees, for example Australian Defence Force personnel attached to a peacekeeping force.

Your employment with the foreign company in country X does not fit into these categories. Therefore section 23AG of the ITAA 1936 does not exempt your salary and wages from Australian income tax.

2. Double tax agreement

The tax treaty between Australia and country X (the country X Agreement) operates to avoid the double taxation of income received by Australian and country X residents. The country X Agreement deals with the situation where an individual is a resident for taxation purposes (under the respective domestic law) of both countries.

For the purpose of the country X Agreement a certain article makes the individual a resident of one of those countries.

This article of the country X Agreement explains that a person's residency status for the purpose of applying the country X Agreement shall be determined as follows:

(a) the person shall be deemed to be a resident of the country in which a permanent home is available to the person;

(b) if the person has a permanent home in both countries, or in neither of them, the person shall be deemed a resident of the country in which the person has an habitual abode;

(c) if the person has an habitual abode in both countries, or in neither of them, the person shall be deemed to be a resident of the country with which the person's personal and economic relations are closer.

You have a permanent home available to you both in Australia and country X.

You consider your habitual abode to be your residence in country X as this is where you live most often and it is also the home where your family spends a significant portion of time. However, your spouse and your child spend school term times in your home in Australia and this period would be longer than the school holiday periods spent with you in country X. You also return to your home in Australia when you are off work.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 advises that the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

In relation to an habitual abode, the OECD Commentary advises the notion of an habitual abode is not simply a test of where a person stays more frequently but also looks to whether living in a particular country is normal or customary having regard to the taxpayer's circumstances.

Klaus Vogel on Double Taxation Conventions, Third Edition, Kluwer Law International 1997, at page 249, paragraph 74a states "that the most significant factor in establishing to which state a taxpayer's personal relations are closer is where the taxpayer regularly lives with his family. Where a taxpayer lives alone, the location of any family members will be relevant if the taxpayer maintains relations with them."

As stated above, you return to Australia during periods that you are rostered off work to be with your family while they are living in your home in Australia during school term times.

In addition the country X Agreement states that the fact that an individual is a citizen or national of a particular country is relevant in determining the extent of the personal and economic relations the individual has with that State. You are a citizen of Australia.

Accordingly, for the purposes of the country X Agreement you are a resident of Australia for taxation purposes due to your personal and economic ties being closer to Australia.

The country X Agreement examines income from dependent personal services, i.e. salaries, wages and other similar remuneration derived by an employee. It explains that remuneration derived by an Australian resident individual from employment exercised in country X is taxable in Australia and may also be taxable in country X. However, income derived from short-term visits is exempt from tax in country X and taxable only in Australia where:

§ the Australian employee does not spend more than 183 days of the relevant country X tax year in country X;

§ the remuneration is paid by, or, on behalf of, an employer who is not a resident of country X; and

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

You have been present in country X for more than 183 days since you first started working there several years ago.

Under the country X Agreement your income is assessable in both Australia and country X.

Methods of eliminating double taxation

The country X Agreement sets out the basis on which double taxation relief will be provided for those forms of income which the agreement allows both countries to tax. The general principle relies on the country of residence providing tax relief by granting the recipient a credit against its tax for the tax paid in the source country.

The country X Agreement says Australia will, subject to provisions of its foreign tax credit system, allow a credit against its own tax for country X tax paid in respect of income derived by an Australian resident from sources in country X.

As country X tax has been paid by you in respect of the same income that is subject to tax in Australia, Australia is required to provide taxation relief under the country X Agreement.

Foreign income tax offset

Division 770 of the ITAA 1997 allows a foreign income tax offset (FITO) for foreign tax that you have paid on income that is included in your assessable income.

To be entitled to a FITO:

1. You must have actually paid, or be deemed to have paid, an amount of foreign income tax.

To count towards a tax offset, you must have actually paid the foreign income tax or be deemed to have paid it. It is not enough that the tax is payable.

If you are entitled to a refund of the foreign income tax paid, or if another benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the foreign tax) is received as a result of a tax payment, the tax is not considered to have been paid.

2. The income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.

Conclusion

You remain a resident of Australia for taxation purposes under the residence according to ordinary concepts test contained in section 6(1) of the ITAA 1936.

As there are no exemptions within the legislation applicable to your circumstances, the income you derive from your employment with the foreign company in country X is assessable in Australia under section 6-5 of the ITAA 1997.

You have advised that you are a resident of country X for taxation purposes and you have been paying tax there. However, under the country X Agreement you are an Australian resident and Australia may tax the income you derive in country X.