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Ruling

Subject: residency and foreign income

Question 1

Are you an Australian resident for taxation purposes after you moved to Australia in 2010?

Answer

Yes.

Question 2

Are you a temporary resident for taxation purposes?

Answer

No.

Question 3

Is your income from country C assessable in Australia?

Answer

No.

Question 4

Is your interest, rental and other income from country D assessable in Australia?

Answer

Yes.

Question 5

Are you entitled to a foreign income tax offset in relation to the tax paid in country D on your assessable interest and rental income?

Answer

Yes.

Question 6

Are you entitled to a foreign income tax offset in relation to any tax paid in country D on your other income?

Answer

No.

This ruling applies for the following period

Year ended 30 June 2011

The scheme commenced on

1 July 2010

Relevant facts:

You moved to Australia with your spouse in 2010.

Your spouse is an Australian citizen.

You currently live in Australia on a 'provisional resident' sub class 309 visa.

You are retired.

You intend to stay in Australia, obtain a permanent visa and subsequently obtain citizenship.

Your only Australian sourced income is interest on a bank account.

You support your spouse and yourself with retirement income from foreign sources.

You receive income from country C & D.

You own a rental property in country D and receive rental income from this property.

You lodge tax returns in country C and D.

You are a citizen of country C and D.

You have you paid tax in country D.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1936 Subsection 6(1)

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

Income Tax Assessment Act 1997 Subsection 6-10(4)

International Tax Agreements Act 1953.

Reasons for decision

Residency

Residency status is a question of fact. Your residency status is relevant in determining your liability to Australian income tax.

The term Australian resident is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6(1) of the ITAA 1936 provides four tests to determine whether a person 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 Commonwealth superannuation fund 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 satisfy the conditions of one of the other three tests.

The resides test

The Macquarie Dictionary defines 'reside' as to dwell permanently or for a considerable time, have one's abode for a time.

The Shorter Oxford English Dictionary defines 'reside' as to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place.

In your case, you have come to Australia to live. As you are living here with your spouse and intend to stay in Australia, you are regarded as an Australian resident under the 'resides test' after your arrival in 2010. As you are a resident under this test, it is not necessary to consider the other three tests.

Temporary resident

Where a person is regarded as a temporary resident for taxation purposes, they may not have to pay tax in Australia on their foreign income. Therefore we need to consider if you satisfy the requirements of being a temporary resident for taxation purposes.

As stated in subsection 995-1(1) of the ITAA 1997, you are a temporary resident if:

· you hold a temporary visa granted under the Migration Act 1958, and

· you are not an Australian resident within the meaning of the Social Security Act 1991, and

· your spouse is not an Australian resident within the meaning of the Social Security Act 1991.

· Subsection 30(2) of the Migration Act 1958 provides that a temporary visa is a visa to remain in Australia:

· during a specified period,

· until a specified event happens, or

· while the holder has a specified status.

Temporary visas are distinguished from permanent visas which allow a person to remain in Australia indefinitely.

Subclass 309 visas are temporary residency visas granted under the Migration Act 1958. Therefore you hold a temporary visa granted under the Migration Act 1958.

Subsection 7(2) of the Social Security Act 1991 defines an Australian resident as a person who:

(a)  resides in Australia; and

(b)  is one of the following:

     (i)  an Australian citizen;

     (ii)  the holder of a permanent visa;

     (iii)  a special category visa holder who is a protected special category visa holder.

Your spouse satisfies the definition of Australian resident in the Social Security Act 1991.

Therefore as you do not satisfy all the conditions of a temporary resident for taxation purposes, the special tax rules in relation to temporary residents do not apply to you.

Australian tax liability

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

The assessable income of an Australian resident also includes statutory income from all sources, whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).

Interest, rent and pensions are generally included as assessable income.

However, in determining liability to tax in Australia, it is necessary to consider not only the income tax laws but also any applicable double tax agreements contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (apart from Australia's general anti-avoidance rules and certain provisions dealing with limitations of tax credits).

Country C income

The relevant schedule to the Agreements Act contains the double tax agreement between Australia and country C. This agreement operates to avoid the double taxation of income received by Australian and country C residents.

The relevant article provides that the income paid by country C to a resident of Australia or to a country C citizen is taxable only in country C.

Therefore your country C income is not taxable in Australia. That is, you are not liable to Australian income tax on this income and it is not included as assessable income on your Australian tax return.

Country D income

The relevant schedule to the Agreements Act contains the double tax agreement between Australia and country D. The Agreement operates to avoid the double taxation of income received by Australian and country D residents.

The relevant article provides that your other income paid to a resident of Australia shall be taxable only in Australia.

That is, this income is assessable income in Australia and it should be included as assessable income on your Australian tax return.

Interest arising in country D and beneficially owned by a resident of Australia may be taxed in Australia as per article 11(1).

As interest is regarded as ordinary assessable income, your interest income derived from your country D bank accounts should be included on your Australian tax return.

It should be noted, that country D may also tax this interest income.

The relevant article of the Agreement states that income from real property may be taxed in the contracting state in which that property is situated. However, the country D Agreement does not prevent Australia from also taxing it. Therefore your net rental income from your overseas property is assessable in Australia.

As you are a resident of Australia, the article provides that subject to the law of Australia, a credit against Australian tax will be allowed for tax paid in country D in accordance with the Agreement.

Foreign income tax offset

From 1 July 2008 the foreign tax credit system was replaced by the foreign income tax offset system.

A foreign income tax offset is a non-refundable tax offset, that will reduce the Australian tax that would be payable on foreign income which has been subjected to foreign income tax.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As your country D interest and rent are assessable to you in Australia and also taxable in country D, the country D tax you paid on this income is used in calculating your allowable foreign income tax offset in Australia.

The offset is based on the total foreign income tax paid, however, it is limited to the amount of Australian income tax that would have been payable on the relevant income (sections 770-70 and 770-75 of the ITAA 1997).

For further information on calculate your foreign income tax offset, please refer to the Guide to foreign income tax offset rules 2010-11 on the Australian Taxation Office website www.ato.gov.au.