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Ruling

Subject: Residency and Assessability of Income

Question 1:

Are you a resident of Australia for taxation purposes for years ended 30 June 2011, 2012 and 2013?

Answer:

No.

Question 2:

Are you considered to be engaged as an independent contractor for the purposes of the DTA between Country X and Australia for years ended 30 June 2011, 2012 and 2013?

Answer:

Yes.

Question 3:

Is the payment you receive from undertaking work within Australia assessable income in Australia for the years ended 30 June 2011, 2012 and 2013?

Answer:

No.

This ruling applies for the following periods:

Year ended 30 June 2011.

Year ended 30 June 2012.

Year ended 30 June 2013.

The scheme commenced on: 1 July 2010.

Relevant facts:

You are an overseas citizen.

You reside overseas.

Your overseas sourced income is derived from a Government Pension, investment income (dividends and interest), and an income earning activity conducted from your family home.

You undertake irregular professional services in Australia.

You are not a member of the PSS or the CSS, or a spouse of such a person, or a child under 16 of such a person.

You are acting as a sole trader in overseas and in Australia.

You hold an active Australia Business Number (ABN) in Australia.

You do not have a business name overseas.

The work is performed in different locations within Australia, generally in country regions.

You have non-resident tax withholding on Australian earned bank interest.

You have no assets in Australia, except for a bank account.

You do not maintain a residence in Australia.

You use temporary accommodation while working and occasionally holidaying around Australia.

You have stated that you were not present in Australia for greater than 183 days during a 12 month period.

More than 50% of your income is attributable to Australia.

You have lodged 2010/2011 tax return using Etax, in Australia as advised by the ATO.

You believed that in order to lodge your return using Etax, you where required to answer yes to questions of whether you were an Australian resident.

You then gained advice from your overseas accountant, who advised that income was not assessable in Australia and should be assessed overseas.

Following the advice from your overseas agent, you approached an accountant in Australia for taxation advice.

Agency Engagement Details

The professional services are arranged by an overseas agency specialising in your type of professional services.

You are paid a daily rate including GST.

You are registered for GST and lodge quarterly BAS in Australia.

Your agent would consider you to be a contractor.

Your agreement with an AGENT contains the following party agreement "whilst an AGENT may represent you as your agent for the period that you utilise our services, including the provision of assisting with negotiating contractual terms and conditions, the AGENT is not your employer. If the AGENT provides you with a placement offer you will be engaged directly by the client as an employee or independent contractor."

It also contains the following clauses:

· Placement of professional services,

· Disclosure of Information,

· Offer of Placement,

· Restriction on Re-Engagement,

· Good faith,

· an Agency Placement Agreement - Schedule X,

· and other employment conditions.

A clause states that you are "responsible for all details of the terms of engagement with that Employer."

A clause states "the individual agrees to disclose to the AGENT all of the terms and conditions of engagement between the individual and the employer including any variations or renewals of the engagement."

A clause describes that you are not to enter into any new engagement directly or through a different agency for a period of 12 months from the date of initial engagement with the AGENT, unless arranged by the AGENT.

A clause goes on to say that where you act outside this agreement you are liable to pay damages to the AGENT amounting to "the fee that the AGENT would have received had the new or extended engagement been arranged through the AGENT."

Amongst the other employee conditions it states that "you are working as a contractor and may be responsible for paying your own tax and other legal requirements".

You must attach amongst other items proof of indemnity insurance.

Individual Engagement Details

During the year ended 30 June 2011 you were engaged at the following places:

· Location 1 - for approximately 1 month, and

· Location 2 - for approximately 3 weeks.

In the year ended 30 June 2012, you have provided copies of your assignment details detailing days you are in Australia working/travelling but not those relating to holiday periods. These days do not exceed 183 days and each assignment is for short periods not exceeding a month.

Each assignment document provides the following information between yourself and each respective Location:

· Details of placement,

· Location contact details,

· Duties, (including overtime requirements/roster use/use of location resources),

· Documents,

· Insurance,

· Travel (flight details as arranged by the AGENT.)

· Accommodation (as provided for you),

Payment

Payment outlines the following requirements by the AGENT; "$Xper day worked, excluding GST, inclusive of on call and call backs. AGENT invoices the location directly for your hours worked and any reimbursements you are entitled to. We will require your Australian Business Number (ABN) or an ABN exemption, bank account details and GST number if applicable to process any payments for your work. "

You are also required to fill in a timesheet for the AGENT at the end of each week of your assignment. This must be signed by the location and payment will not be made without doing so.

"Any expenses for reimbursement must been pre-approved and must be supported by original receipts."

Sample Location Contract Details

You have also provided a sample contract between yourself and the location.

The location has advised you that they considered you a contractor.

You are also required to provide a form for yourself and any other subcontractors you engage to provide services under your assignment.

The agreement contains:

The Agreement, including reference to a standard contractual document contained online and the following schedules:

· Schedule Details of contracting individuals, the location and general manager,

· Schedule Services,

· Schedule Availability,

· Schedule Additional Services,

· Schedule Payments.

Assumptions:

N/A

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1936 Subsection 6(1)

Taxation Administration Act 1953

Convention Between Australia and Overseas for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion Articles X & Y.

Reasons for decision

Residency

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

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, and

· the superannuation 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 will still be considered to be a resident of Australia for tax purposes if they meet 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'.

You have not established a settled or usual abode in Australia and can not be considered to be residing here as evidenced by:

· Whilst in Australia you stay in temporary accommodation arranged by your AGENT.

· The work is performed in different locations within Australia for less than a month at a time, generally in country regions.

· Your only assets here are an Australian bank account.

· You are in Australia for short periods to work and holiday.

Therefore, you are not considered to be residing in Australia.

The domicile test and permanent place of abode 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. 

A person's domicile is established at birth when they acquire a domicile of origin, being the country of their father's permanent home. The domicile of origin is retained until such time as a domicile is established by choice or by operation of law in another country.

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. A domicile may be changed by operation of law for example where a person has obtained a migration visa.

In your case you have not indicated a permanent intention to change your domicile to Australia as you are retaining ownership of a property overseas and have no firm intentions to live permanently in Australia. You have not currently indicated an intention to gain citizenship or a migration visa in 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 the taxpayer in the meantime setting up a permanent place of abode elsewhere.

In your case:

· you have advised that it is your current intention to make your home overseas,

· your only association with Australia is an Australian bank account and your temporary employment and accommodation here,

· you are working overseas, with income sourced from a government pension, investment income and income from conducting work from home,

Therefore, you are not considered to have established a permanent place of abode in Australia.

The 183-day test

Even though there is a possibility that you may be in Australia for more than 183 days, it has been identified that you have no intentions to reside here permanently nor have you established a permanent place of abode.

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.   

You will not be treated as a resident under this test as you are not a member of the PSS or the CSS, a spouse of such a person, or a child under 16 of such a person. 

Your residency status

As you are not considered to be a resident of Australia under any of the tests of residency outlined in subsection 6(1) of the ITAA 1936, you are not considered to be an Australian resident for the years ended 30 June 2011, 2012, 2013.

Engagement status

In order to determine where the money you earn whilst working in Australia will be assessable income, we need to consider Article 7 Business Profits and Article 14 Income from Employment of the Convention Between Australia and Overseas for the Avoidance of Double Taxation with Respect to Taxes on Income and Fringe Benefits and the Prevention of Fiscal Evasion.

The nature of your engagement, i.e. whether you were engaged as an employee or as an independent contractor in Australia will determine whether Article 7 or Article 14 is relevant to your circumstances.

To begin with it is helpful to dispel myths which exist for contractors. Note none of the following makes a worker a contractor:

· a business only needs someone for short term or irregular work (such as during busy periods),

· they are engaged for their specialist qualifications or skills,

· the industry 'norm' is to use contractors,

· they have an Australian business number (ABN), and or

· they have a registered business name.

Just because a worker has an ABN or registered business name does not mean they will be a contractor for every job.

To determine whether you are an employee or a contractor, we will need to consider the whole working arrangement and look at the specific terms and conditions under which the work was performed.

What constitutes an employee is not defined in tax legislation, so the word takes its ordinary meaning as handed down by the courts. The Commissioner has released Taxation Ruling TR 2005/16 which discusses the meaning of an employee.

There is no single factor that will be conclusive in determining whether a worker is an employee or contractor. You need to look at the working arrangement as a whole and examine the specific terms and conditions under which the work is performed.

Taxation Ruling TR 2005/16 provides guidance as to what weight and order the factors should be considered when determining the status of a worker, but ultimately it is a matter of judgement.

It states that "Consideration should be given to the various indicators identified in judicial decisions which have considered the employee/independent contractor distinction bearing in mind that no list of factors is to be regarded as exhaustive and the weight to be given to particular facts will vary according to the circumstances. Where a consideration of the indicia points one way so as to yield a clear result, the determination should be in accordance with that result".

Consideration must be given to the terms and the circumstances of the formation of the contract, particularly "all the terms and conditions…whether express or implied, in light of the circumstances surrounding the making of the contract".

A clause which attempts to classify and or define in a contract as an employee and or contractor relationship is not conclusive, the true nature of the relationship must be considered. "However, such a clause may be used to overcome any ambiguity as to the true nature of the relationship".

In your case the agent has expressly stated that they are not your employer. Your sample location has also advised you that they consider you a contractor.

Your agency agreement details that you are engaged directly by your respective employers. As such we will consider the details provided by your agent and the contract provided which details the relationship between yourself and the sample location.

Indicators of an employee / employer relationship

Control

Where the business/employer has the right to direct the way in which the worker performs their work versus the situation where the worker has the freedom in the way the work is done subject to the specific terms in any contract or agreement.

The location has only limited control over your engagement:

· you are required to complete a timesheet at the end of each week worked in order to receive payment.

· Your work is rostered based on mutual agreement.

· You are allowed to subcontract and use your own resources,

· Importantly no restrictions are put on the manner in which you do your work, the location has set expectations and the normal legal and ethical restrictions apply to your work however daily activities are left to your professional discretion.

Risk

You take commercial risks and as such are advised by the board to seek appropriate level of insurance.

You are legally responsible for your work and liable for the cost of rectifying any defect in your work as acknowledged by the board of the location.

The board also ignores any responsibility for your personal taxation, superannuation, compensation, leave entitles and the like.

Whether the work can be delegated or subcontracted:

You have been given the option to delegate to a subcontractor. And are required in the event that you can not meet your duties, to find another contractor with appropriate skills to cover for you.

Does the worker operate on their own account or in the business of the payer?

At each of your assignments throughout 2011 and 2012 you have entered into separate contracts with the respective locations as arranged for you by agent. Each assignment has been for periods of less than a month, but ranging from a few days to less than a month.

You are operating your own business independently from the business of the respective locations. You perform services as specified in your contract or agreement and you are free to accept or refuse additional work. You are not considered a regular part of the location workforce.

Provision of tools and equipment and payment of business expenses:

· You are provided with some resources normal to your type of engagement, but are also given the flexibility to supply your preferred "tools of trade" where appropriate and legal to do so. You are reimbursed, but only for agreed costs where evidence is provided e.g. for travel costs.

'Results' contracts

An independent contractor generally contracts to achieve a result whereas an employee contracts to provide their labour (typically to enable the employer to achieve a result). In a result based contract, often the payment is made from a negotiated contract price as opposed to an hourly rate.

As per your agreements you are paid a set rate per day, which is inclusive of any additional hours worked outside standard location hours.

The interaction of ABN with the Taxation Administration Act 1953:

· Although the existence of an Australian business number (ABN) does not prevent an individual from being engaged as an employee, the quotation of an ABN would indicate that the activities done by an individual is not as an employee.

· You have an active ABN and consider yourself a sole trader in Australia and overseas.

Your engagement status

· You have substantial control over the way in which you conduct yourself in your work.

· You bare personal risk and are liable for most costs.

· You are able and required to subcontract your work.

· You are not an integrated member in the location and are engaged for short term periods.

· You are provided flexibility as to whether you use resources as provided by the location or your own.

· You are paid a set mutually agreed amount, and finally, you provide invoices with your ABN.

Therefore, you are considered to be engaged as an independent contractor whilst working in Australia conducting your professional services.

Double Tax Agreement (DTA) between overseas and Australia

Your income resulting from your engagement as an independent contractor will be assessable overseas as per the DTA.

Further issues for you to consider

Making employment look like contracting

Sometimes businesses will try to make a working arrangement that is employment look like contracting by:

· requesting their worker to obtain an ABN

· setting up a contract specifying the worker is a contractor.

Often these businesses are trying to illegally lower their labour costs by avoiding their pay as you go (PAYG) withholding and super obligations for the worker. If a worker is legally an employee, an ABN or contract specifying the worker is a contractor makes no difference and will not:

· override the employment relationship or change the worker into a contractor

· change the PAYG withholding and super obligations a business needs to meet.