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Ruling

Subject: Residency - Foreign Income

Question 1:

Were you an Australian resident for income tax purposes?

Answer 1:

Yes.

Question 2:

Is the employment income you derive from working in Country A assessable income in Australia?

Answer 2:

Yes.

This ruling applies for the following period:

Year ended 2010-11.

The scheme commenced on:

1 July 2005.

Relevant facts

You are an Australian citizen and Australia is also your country of origin.

You left Australia for Country A on a specific visa some time in the 2005-06 income year.

You are considered a resident of Country A for tax purposes.

You have no set date for returning to Australia. Your intention is to remain in Country A whilst work in your field of experience continues to be available.

You are employed by a Country A company in a specific role.

You have a three year employment contract with your employer in Country A. This is set to be renewed some time in the 2011-12 income year for a further three years.

You did however return to Australia some time in the 2007-08 income year to assist your spouse in recovering from a medical condition. Your stay was approximately 12 months after which you resumed your employment with the Country A company to whom you were previously employed.

You rent out a house in Country A where you work.

In Australia, you resided in a house which is currently occupied by your spouse and children. You jointly own this with your spouse.

You and your spouse also jointly own two rental properties and a bank account in Australia. You both derive monthly rental income and interest income from the bank account.

You currently pay tax in Country A on the income you derive from working there. You do not pay tax in any other country besides Australia and Country A.

In 20XX, your spouse and two youngest children did accompany you to Country A for approximately 6 months. They returned to Australia for the final term of schooling as the eldest of the two was completing their year 10 Certificate. They have since remained in Australia with the eldest of the two continuing onto university and the youngest completing their senior certificate and going to university to study in 2012.

You have no social or sporting connections in Australia.

You actively participate in and support differing social activities within the community where you live in Country A.

Through physical and small donations, you support sporting and employee groups within the company that employees you.

Neither you nor your spouse have been employees of the Commonwealth Government of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Subsection 23AG(1)

Income Tax Assessment Act 1936 Subsection 23AG(1AA)

Income Tax Assessment Act 1936 Subsection 23AG(2)

International Tax Agreements Act 1953 Section 3AAA

International Tax Agreements Act 1953 Section 5

Reasons for decision

Residency in Australia

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. 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 have been residing in Country A for most of the 2010-11 income year, you were 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've been away from Australia for all or most of the 2010-11 income year. You state that the only time you would have come to Australia is during your 15 days annual leave that is only taken at a mutually agreed time between you and your employer. However, you will be considered to have maintained your domicile in Australia as your associations with Australia will be considered to be more significant as:

· your spouse and children reside in Australia in your jointly owned property.

· you have two rental properties you jointly own with your spouse in Australia. You derive rental income from those properties.

· you only left Australia on a specific visa.

You also have a jointly owned bank account from which you derive interest income.

Based on these facts, it is considered that you have not established a permanent place of abode overseas. Therefore, you are considered to be an Australian resident for income tax purposes under the domicile test.

Your residency status

As you are deemed to be an Australian resident 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 will be considered to be an Australian resident for income tax purposes for the 2010-11 income year.

Residency and taxing rights

In determining liability to Australian tax of foreign sourced income, it is necessary to consider not only the income tax laws but also any applicable tax treaty.

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

As you are an Australian resident for income tax purposes and Country A also considers you a resident for tax purposes, it is necessary to consider the tie breaker rules in the Country A Agreement.

A particular Article of the Country A Agreement provides tests of residency that are used where the individual is a resident of the two countries (tie breaker tests). The tie breaker tests ensure that the individual is a resident of one country for the purposes of working out liability to tax on their income. The tie breaker rules do not change a taxpayer's residency status for domestic law purposes.

Another specific Article of the Country A Agreement provides that a person's residency status for the purpose of applying the Country A Agreement shall be determined as follows:

· the person shall be deemed to be a resident solely of the country he/she has a permanent home available.

· If the person has a permanent home in both countries, or does not have a permanent home in either, the person will be deemed to be a resident of the country in which he/she has a habitual abode.

· If the person has a habitual abode in both countries, or does not have a habitual abode in either, the person will be deemed to be a resident of the country with which his/her personal and economic ties are closer.

In your case, you have a permanent home available to you in both Australia and Country A. You consider both your homes in Australia and Country A to be your habitual abode. Although you derive employment income from Country A, in Australia you have two jointly owned rental properties and a bank account that derives income. Your spouse and children also reside in another property you jointly own in Australia.

Therefore, under paragraph (c) of a particular of the Country A Agreement, you are considered to be a resident of Australia for the purposes of applying the provisions of the Country A Agreement to income earned by you during the period of dual residency.

Foreign employment Income

Subsection 23AG(1) of the ITAA 1936 provides that foreign earnings derived during a continuous period of foreign service of not less than 91 days employment in a foreign country are exempt from tax in Australia.

The exemption does not apply if the income is exempt from tax in the foreign country only because of any of the reasons listed in subsection 23AG(2) of the ITAA 1936. One of the reasons listed is a treaty contained in the International Tax Agreements Act 1953.

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

A particular paragraph of an Article in the Country A Agreement provides that salary and wages derived by an Australian resident, for employment exercised in Country A may be taxed in Country A.

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 do not satisfy any of the conditions above under subsection 23AG(1AA). Therefore, the employment income you derived from working in Country A as a dual resident in both Country A and Australia, is not exempt in Australia under section 23(AG) of the ITAA 1936 and is assessable income in Australia.

Foreign Income Tax Offset

From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset (FITO) system

A FITO is a non-refundable tax offset, and 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.