Edited version of your private ruling

Authorisation Number: 1012082218957

This edited version of your ruling will be published in the public register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. If you have any concerns about this ruling you wish to discuss, you will find our contact details in the fact sheet.

Ruling

Subject: Residency

Questions and answers:

1. Are you a resident of Australia for taxation purposes from when you departed Australia on 18 November 2011?

No.

2. Is your Australian employer required to withhold tax?

No.

3. Are you required to declare Australian sourced rental income in an Australian income tax return?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2012
Year ended 30 June 2013
Year ended 30 June 2014
Year ended 30 June 2015

The scheme commenced on:

1 July 2011

Relevant facts and circumstances

You are an Australian permanent resident.

You are a citizen of both country X and country Y.

Your country of origin is country X.

You left Australia indefinitely to take up a position with your Australian employer in country Z on
XX November 20XX.

You are living in country Z on a permanent residency visa.

The initial requirement was for you to sign a one year contract. Your employer does this to get a minimum commitment.

Your employment contract can and will be extended until you choose to resign from your position.

You plan to reside in Country Z indefinitely and have no current return date.

You have not or will not come back to Australia to visit for any period.

You have taken all your personal belongings with you overseas.

You have advised your financial institutions of your overseas address.

You have secured a permanent apartment locally in country Z to live.

You have opened bank accounts in Country Z.

You have two properties in Australia, one is a rental property and is managed through a real estate agent.

The other is being looked after by a friend until tenants can be found. You lived in this house when you were in Australia; it was your permanent residence in Australia.

You will be maintaining Australian bank accounts as your mortgage repayments are linked to these accounts. You also have a managed fund with one financial institution and house furniture which will be left in the house and rented fully furnished.

None of your family members accompanied you overseas. They reside in country X and not in Australia. They are employed by companies based in country X and have no immediate plans to relocate.

You have no social or sporting connections with Australia.

You are part of the Country Z Expat community.

You have never worked for the Commonwealth Government of Australia.

Your income tax returns lodged with the ATO indicate that you do not have a spouse.

You are over 16 years of age.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)
Income Tax Assessment Act 1997 Subsection 6-5(2)
Income Tax Assessment Act 1997 Subsection 6-5(3)
Income Tax Assessment Act 1997 Subsection 6-15(2)
Income Tax Assessment Act 1997 Subsection 6-20(1)
Taxation Administration Act 1953 Subsection 12-1(1) of Sch 1
Taxation Administration Act 1953 Subsection 12-1(1A) of Sch 1
Taxation Administration Act 1953 Section 12-35 of Sch 1

Reasons for decision

Pay-as-you-go (PAYG) withholding tax

Section 12-35 of Schedule 1 to the Taxation Administration Act 1953 (TAA) advises that an entity must withhold an amount from salary, wages, commission, bonuses or allowances it pays to an individual as an employee (whether of that or another entity).

However, subsections 12-1(1) and 12-1 (1A) of the TAA explain that an entity need not withhold an amount under section 12-35 of the TAA from a payment if the payment is exempt income or non-assessable non-exempt income of the entity receiving the payment.

Australian income tax legislation

Division 6 of the Income Tax Assessment Act 1997 (ITAA 1997) discusses assessable income and exempt income.

Subsection 6-5(2) of the ITAA 1997 advises that the assessable income of an Australian resident taxpayer for an income year includes the ordinary income derived by the taxpayer from all sources during that year.

Subsection 6-5(3) of the ITAA 1997 explains that ordinary income derived by a foreign resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable in Australia.

Ordinary income generally includes three categories:

· income from rendering personal services including employment income,

· income from carrying on a business, and

· income from property (such as rent), interest and dividends.

Generally, Australian courts have held that the source of employment income is where the employee performs their duties (C of T (NSW) v. Cam and Sons Ltd (1936) 36 SR (NSW) 544; 4 ATD 32 and FC of T v. French (1957) 98 CLR 398; (1957) 7 AITR 76; 11 ATD 288). The courts also confirmed that it is appropriate to apportion income earned to reflect the source of income.

Thus, employment income earned while carrying out duties in Australia is considered to be sourced in Australia. Alternatively, employment income earned while being carried out overseas is considered to be sourced in that overseas country, unless it is merely incidental to the performance of the taxpayer's duties in Australia.

Subsection 6-15(2) of the ITAA 1997 advises that an amount which is exempt income is not assessable income.

Subsection 6-20(1) of the ITAA 1997 tells us that an amount of ordinary income is exempt income if it is made exempt from income tax by a provision of the Income Tax Assessment Act 1936 (ITAA 1936), the ITAA 1997 or another Commonwealth law.

Residency for the purpose of Australian tax

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests which will help us ascertain whether you will be a resident of Australia for income tax purposes when you leave to accept a position overseas. These tests are:

(i)   residence according to ordinary concepts;

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

(iii)   the 183 days/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.  However, where you do not reside in Australia according to ordinary concepts, you may still be considered to be a resident of Australia for tax purposes if you satisfy the conditions of one of the other three tests.

Residence according to ordinary concepts

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 Z since you left Australia to commence your employment during the 2011-12 financial year, you are not a resident of Australia for tax purposes under this test.

The domicile test/permanent place of abode

Domicile

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 of 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 the where you were born. As your country of origin is country X, that is your domicile of origin.

In order to show that you have chosen a new domicile of choice in a country other than your origin, you must be able prove an intention to make your home indefinitely in that country. You became a permanent resident of Australia and you purchased a home in Australia. Therefore you chose a new domicile of choice in Australia.

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

Permanent place of abode

We will now determine if you have established a permanent place of abode outside Australia.

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 you in the meantime setting up a permanent place of abode elsewhere.

Income Tax Ruling IT 2650 lists the following relevant factors to be taken into account in determining a person's permanent 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 move on to another country or to return to Australia at some definite point in time;

· whether 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) has been established outside Australia;

· abandonment of residence or place of abode in Australia;

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

· durability of association that the individual has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments he or she is leaving permanently, family ties and so on.

The weight given to each factor varies with the circumstances of each individual taxpayer. When we apply your circumstances to the above criteria:

You left Australia during the 2011-12 financial year to take up a position with your Australian employer in Country Z for an initial period of one year.

You can and will extend this contract and will continue to live and work in Country Z until you choose to resign from the position. You plan to stay in Country Z indefinitely and have no current return date.

You have secured a permanent apartment locally in country Z to live in and you have opened bank accounts in Country Z.

You are arranging for your permanent residence in Australia to be tenanted fully furnished.

You have kept a bank account in Australia to facilitate mortgage payments on your house in Australia as well as a managed fund.

You will not have any other assets in Australia and you have advised your financial institutions of your overseas address.

You do not have any social or sporting connections with Australia.

In short, you have left Australia indefinitely and you are living and working in Country Z on a permanent residency visa. You have arranged for your residence to be tenanted and you have taken your personal belongings with you. In addition, you have advised your financial institutions of your overseas address.

When we take all these facts into consideration, it is clear that you have established a permanent place of abode outside Australia.

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

The 183-day/usual place of abode test

You are a resident under this test if you will actually be in Australia, continuously or intermittently, during more than one-half of a year of income, unless the Commissioner is satisfied that your usual place of abode is outside Australia.

You left Australia on 18 November 2011 and will not return to visit for any period. You plan to stay in Country Z indefinitely and have no current return date.

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

The Commonwealth superannuation test

An individual is still considered to be a resident of Australia if that person is 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.

In your case you are not a member of the CSS or the PSS. You are over 16 years of age and you do not have a spouse.

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

Your residency status

For the reasons outlined above you are not a resident of Australia for tax purposes under any of the tests of residency outlined in subsection 6(1) of the ITAA 1936. You are a foreign resident for taxation purposes from when you left Australia.

Conclusion

The salary payments the employer makes to you while you are working in Country Z are ordinary income and are sourced from Country Z. Consequently, under the exempt provisions contained in subsection 12-1(1A) of Schedule 1 to the TAA, your employer is not required to withhold any income tax from the salary and wages paid to you while you are a foreign resident.

You will need to contact your employer and advise them to cease withholding tax from your salary and wage income.

Australian rental income

Rental income falls within the concept of ordinary income and its source is deemed to be where the property is located.

Therefore, rental income derived by a foreign resident from a property located in Australia is assessable in Australia, and you are required to lodge an Australian tax return in each year you derive such income.

Australian interest income

Australian interest income paid to a foreign resident is generally subject to non-resident withholding tax under subsection 128B(1) of the ITAA 1936. Non-resident withholding tax represents the final tax liability interest paid to a foreign resident and is not included in the assessable income of the foreign resident.

As you have notified your Australian financial institutions of your overseas address, any interest income derived after ceasing to be an Australian resident will be subject to the withholding tax provisions as a final tax and you will not need to include it in your Australian tax return.

Changing residency status during a financial year

As your status changed from resident to foreign resident during a financial year, you will need to answer 'yes' to the question 'Are you an Australian resident?' on your tax return for the year in which you ceased residency. This ensures you are taxed at resident rates for that part of the tax year that you were a resident. Your non-residency for part of the year is taken into account by a reduction in your tax-free threshold. You are entitled to a pro-rata tax-free threshold for the number of months you were an Australian resident.

Foreign residents do not have to pay the Medicare levy, so you can claim the number of days that you were not an Australian resident during a tax year in your return as exempt days.