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Ruling

Subject: Residency, foreign income and the Medicare levy

Question 1

Are you considered to be a resident of Australia for taxation purposes?

Answer

Yes.

Question 2

Is your foreign sourced income assessable in Australia?

Answer

Yes.

Question 3

Are you liable to pay the Medicare levy for the period you were covered by the medical insurance provided by your overseas employer?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 2011

The scheme commences on:

1 July 2010

Relevant facts and circumstances

You were born in Australia.

You are an Australian Citizen.

You were contracted to work in Country X for slightly more than 12 months. This contract overlapped the 2010-11 and 2011-12 financial years.

At the end of your contract you stayed on for a short holiday before returning to Australia.

You were only in Australia briefly before you started a 12 month contract working in Country Y.

At the end of this period, your employer may offer an extension to your contract for a further 12 months.

Your employer supplies you with accommodation when contracted to work overseas and with medical insurance cover.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1),

Income Tax Assessment Act 1936 Section 251S,

Income Tax Assessment Act 1936 Section 251T,

Income Tax Assessment Act 1936 Section 251U,

Income Tax Assessment Act 1997 Section 6-5,

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

International Tax Agreements Act 1953 Section 4.

Reasons for decision

Summary

You are considered to be a resident of Australia for taxation purposes; therefore the income that you received from working in Country X will be taxable in Australia. However, if you have paid any tax on this income in Country X then a tax credit will be allowed against any Australian tax payable on this income.

You are liable to pay the Medicare levy as you are a resident of Australia for taxation purposes and you do not fall into any of the exemption categories.

Detailed reasoning

Residency

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. An individual will be a resident of Australia if they satisfy any one of these four tests. These tests are:

§ The resides test

§ The domicile test

§ The 183 day test

§ The Superannuation test.

The domicile test

If a person is considered to have their domicile in Australia, he or she is considered an Australian resident unless the Commissioner is satisfied that he or she has a permanent place of abode outside of Australia. Taxation Ruling IT 2650 provides the Commissioner's guidelines on what factors should be considered in determining residency under this test.

In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able to 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.

Paragraph 23 of IT 2650 lists some of the factors to be considered in deciding whether you have a permanent place of abode outside Australia. The weight given to each of the factors varies depending on the circumstances. One of these factors is the length of the intended stay in the overseas country.

Although paragraph 25 of IT 2650 states that the duration of your stay in the overseas country is itself not conclusive and needs to be considered with all the other factors listed in paragraph 23, a period in the overseas country of two years or more would generally be regarded as a substantial period indicating the establishment of a permanent place of abode in that country.

Paragraph 26 of IT 2650 states that where a person has no fixed or habitual place of abode overseas but moves from one country to another, any association with a particular place overseas would be purely temporary or transitory and he or she would not be considered to have adopted an alternative domicile of choice or a permanent place of abode outside of Australia.

In your case, you are an Australian citizen by birth and as such Australia is your domicile of origin. You were contracted to work in Country X for slightly more than a year. After your contract ended you stayed in Country X for a small holiday before you returned to Australia. Shortly after returning to Australia you started a 12 month contract in Country Y.

Although the total period of your employment overseas in Country X and Country Y will be longer than two years, your stay in Country X was for only slightly more than a year. Therefore, it is not considered that you established a permanent place of abode in Country X. Consequently, under the domicile test you remained an Australian resident for income tax purposes while you were in Country X.

Assessable income and the foreign income tax offset

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

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

Tax treaties are given the force of law domestically by the International Tax Agreements Act 1953 (the Agreements Act).

The Agreements Act states that where there are inconsistencies with an Act imposing Australian tax, the Agreements Act will prevail (except in relation to tax avoidance schemes).

Australia has signed a tax treaty with Country X (the Country X Agreement).

An article of the Country X Agreement provides that personal services income derived by an individual who is a resident of Australia shall be subject to tax only in Australia unless the services are performed or exercised in Country X. If so the income may also be taxed in Country X.

However, another article of the Country X Agreement provides that where you have derived income in Country X and are required to pay tax in Country X on that amount then you will be allowed a credit against any Australian tax payable on that income.

In your case, you are considered to be a resident of Australia for taxation purposes; accordingly the income that you receive from Country X is required to be included in your assessable income under subsection 6-5(2) of the ITAA 1997.

However, if you have paid any tax on this income in Country X then a tax credit will be allowed against any Australian tax payable on this income.

Medicare levy

Section 251S of the ITAA 1936 provides that the Medicare levy is payable by any person who, at any time during the relevant year of income, is a resident of Australia.  However, there is a provision in section 251T of the ITAA 1936 which allows 'prescribed persons' to be exempted from the Levy. A prescribed person is defined in section 251U of the ITAA 1936 as the following:

§ blind pensioners and recipients of sickness allowance from Centrelink

§ persons entitled to full free medical treatment under Defence Force arrangements or the Veterans' Entitlements Act 1986

§ non-residents of Australia for taxation purposes

§ residents of Norfolk Island

§ members of diplomatic missions or consular posts in Australia, and

§ persons who have a certificate from the Health Insurance Commission stating that they are not entitled to Medicare benefits.

In your case, you are an Australian resident for taxation purposes and, from the information that you have provided to us, you are not a prescribed person. As such, you are not eligible for a Medicare levy exemption.

It is acknowledged that you were covered by medical insurance provided by your employer while you were working in Country X. However, these circumstances do not fall within any of the Medicare levy exemption categories listed in the legislation.