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Ruling

Subject: Residency for tax purposes

Question 1:

Are you a resident of Australia for taxation purposes?

Answer:

No.

Question 2:

Can you claim deductions against your Australian royalty income in your Australian income tax return?

Answer:

No.

This ruling applies for the following periods:

Year ending 30 June 2013

The scheme commenced on:

1 July 2012

Relevant facts and circumstances

You are a citizen of Australia and Country Y.

You were born in Country Y.

You departed Australia a few months ago for Country Z.

You have a dependant resident visa for Country Z .which expires in the year ending 30 June 2013.

You accompanied your spouse to Country Z for work purposes.

You do not intend to live permanently in Country Z.

You are uncertain at this stage if your spouses work contract will be extended beyond the day your visa expires.

You will be coming back to Australia to visit family later in the year.

You are renting accommodation in Country Z.

You have a bank account in Country Z for daily living expenses.

You are renting your house out in Australia.

You have a bank account in Australia.

You do not pay tax in any other country.

You earn royalty income in Australia. The payer of the royalties withholds 30% non-resident withholding tax from these payments.

You have family and friends in Australia and no social or sporting connections in Country Z.

Neither you nor your spouse have ever been or are currently Commonwealth government employees.

Relevant legislative provisions:

Income Tax Assessment Act 1936 Subsection 6(1).

Income tax Assessment Act 1997 Section 6-5.

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

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) advises that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a non-resident of Australia for taxation purposes, your assessable income includes only income from an Australian source.

Subsection 995-1(1) of the ITAA 1997 defines an Australian resident as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA 1936).

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 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: Residency - Permanent Place of Abode outside Australia.

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 an Australian resident for tax purposes if they satisfy the conditions of one of the three other tests.

The resides test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd 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'.

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.

In your case you left to live in Country Z due to your spouses work commitments.

You are living in rented accommodation.

You are living in the rented accommodation for the whole of the period you are in Country Z and therefore it is your settled or usual place of abode in Country Z.

You are therefore not residing in Australia according to ordinary concepts and you are not a resident of Australia for tax purposes according to this test.

The domicile 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 of Australia.

Domicile

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, the domicile of origin of an individual is where the individual was born. 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. In relation to domicile of dependency, such a domicile will normally only exist in relation to minors or individuals who are of unsound mind.

In your case you were born in Country Y and you are a citizen of both Australia and country Y. Your domicile of origin is Country Y and your domicile of choice is Australia.

As your domicile is Australia, you will be a resident of Australia for tax purposes unless the Commissioner is satisfied that you have a permanent place of abode outside of Australia.

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.

In your case:

· You left Australia to live and work in Country Z

· You accompanied your spouse to Country Z

· You live in rented accommodation in Country Z which is settled and for a considerable period

· You have rented out your house in Australia

The Commissioner is satisfied that you have established a permanent place of abode outside Australia therefore you are not a resident under this test.

The 183 day test

When a person is present in Australia for 183 days during the year of income the person will be a resident, 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.

· You will be away from Australia for more than 183 days.

· You are not sure if your spouses work contract will be extended.

· You are not a resident under this test.

The superannuation test

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

This test does not apply to you.

Therefore, you are not a resident of Australia under this test.

Your residency status

You are a non-resident of Australia for taxation purposes as you do not meet any of the tests of residency.

Royalty payments

Where royalties are paid to a non-resident of Australia, the payer is legally required to withhold 30% non-resident withholding tax from the royalty payments.

Non-resident withholding tax is a final tax. This means that any income subject to it is not included in the non-resident taxpayer's Australian income tax return. As the income is not included in the taxpayer's return, it follows therefore that no deductions can be claimed against that income.

In your case, you are a non-resident of Australia for tax purposes. You earn royalties from Australia. The payer of the royalties withholds 30% non-resident withholding tax from the payments.

Because non-resident withholding tax is a final tax, you cannot include this royalty income in your Australian income tax return and you cannot claim any deductions associated with this income in your Australian income tax return.