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Ruling

Subject: Residency & Personal Services Income

Questions and answers:

1. Are you a resident of Australia for taxation purposes from the date you arrived in Australia?

Yes.

2. Is the income you received from the date you arrived in Australia, Personal Services Income?

Yes.

This ruling applies for the following period:

Year ended 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts:

You moved to Australia at the end of the relevant year.

You have a Long Term business Visa.

You have a Dependent Visa as your spouse's employer has sponsored you and your spouse.

Your origin is Overseas.

You were born Overseas and you are a citizen of a location Overseas.

Up until you came to Australia you had been living and working Overseas with some time spent in other Overseas locations holidaying.

Both you and your spouse intend to reside in Australia for the term of current employment Visa's.

You have intentions to stay on longer than your current VISA, if you are able to gain work and enjoy your time here.

You currently have a lease but once this ends you will take up another long term lease or investigate the possibility of purchasing a property in Australia.

Your only assets Overseas are bank accounts.

You have joined a sport teams here.

You have been applying for jobs here but have also been actively investigating the possibility of doing sole trader consultancy work here if available.

You have no plans in the short term to leave Australia (e.g. for a holiday).

Any future holidays e.g. to visit friends/family Overseas would be for less than 2 weeks in duration.

No tax will be paid Overseas this year.

Neither you nor your spouse has ever been a commonwealth government employee.

No family apart from your spouse has accompanied you to Australia and you have no family living in Australia.

You have no children.

In Australia you applied to set up a Sole Trader Business to enable you to work as a consultant in your field of expertise.

Before arriving in Australia you worked overseas for overseas clients.

You were offered business with an overseas client after you located to Australia.

The contract has no time limit and can be terminated upon mutual agreement between you and your client.

You are working from home. You are able to do all your work over the internet via connection to your client's server.

Your work requires that you use your professional skills. This involves analysis of X and assisting the new X manager to learn the job requirements.

You are paid an hourly rate.

You were previously employed as a X manager.

You also assist with the maintenance of the Y system.

You estimate that 80% of your consultancy work time is spent using your knowledge, skills and expertise. The remaining 20% of the time relates to the use of other resources.

You do not have a specific room as your office, but it is attached to the rest of your residence.

Both you and your spouse's names are on the lease for this property.

For the subsequent financial year all your income came from the one client who you started working for in your consultancy role after locating to Australia.

You will be applying for jobs in Australia (as an employee) and will also be looking for clients here in Australia.

You do not have a Personal Services Business Determination.

Relevant legislative provisions:

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

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1997 Section 87-5.

Reasons for decision

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 'resides' 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 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'.

Taxation Ruling TR 98/17 provides guidelines in determining the residency status of individuals entering Australia. There are many factors to be considered in determining an individual's residency status.

Broadly, the main issues are:

· Behaviour while present in Australia,

· Intention or purpose of presence,

· Family and employment ties,

· Maintenance and location of assets,

· Social and living arrangements, and

· Period of physical presence in Australia.

TR 98/17 states the following:

The individual's intention, purpose or reason for being in Australia assists in determining whether an individual resides here. While individuals may have multiple reasons, there is usually a main purpose to their presence.

A settled purpose, such as employment or education, may support an intention to reside in Australia. However, the intention must be more than merely being a traveller or visitor who may supplement their savings by obtaining casual employment. Staying for a short period for work purposes is normally insufficient to establish that an individual is a resident.

The visa notation on the passport is an indicator of the individual's purpose for being in Australia. However, the criteria for determining residency for tax purposes are not the same as the criteria used by the Department of Immigration and Multicultural Affairs. The visa notation is not the only consideration in determining residency for tax purposes, as all the facts surrounding the individual's presence need to be taken into account.

In most cases, the Commissioner accepts that a visit to Australia of less than six months is not sufficient time to be regarded as residing here. When determining whether individuals are residing here, if their visit is for six months or more, the Commissioner considers their behaviour while in Australia.

You moved to Australia at the end of the relevant year on a long term dependent visa. You have been working full time from your house here. You are living here in a residence with your spouse. Both you and your spouse have your names on a lease for an residence.

You have been making efforts since arriving to establish yourself as a sole trader consultant in your area of expertise. You are close to finishing work for your overseas client and will be seeking employment and or consultancy work in Australia.

Your behaviour since arriving in Australia indicates an intention to reside here longer than would be of a temporary nature as you have:

· a lease on a property,

· live with your spouse,

· have been working or seeking full time employment and consultancy work in your area of expertise,

· a long term visa/sponsorship by your spouses employer,

· you have joined a sporting team,

· you limited assets Overseas and would like to have assets in Australia,

· you have no intentions to leave Australia.

Therefore, you are considered a resident of Australia under the resides test.

Your residency status

As you are considered, under the resides test, to be a resident from the date of arrival, you are considered to be an Australian resident for taxation purposes under subsection 6(1) of the ITAA 1936.

Personal Services Income

Personal services income (PSI), defined as a reward for, or the result of, your personal efforts or skills, can affect tax obligations for contractors and consultants.

If you receive PSI then certain rules (known as the PSI rules) may apply that:

· Limit the deductions you can claim.

· Affect your tax reporting obligations.

Many consultants and contractors operate as a sole trader or through a company, partnership or trust. In many cases, the income received for the work they do may be classified as personal services income (PSI).

To work out if your income is PSI, you first need to work out what percentage of the income you receive from each contract you complete is for:

· labour - that is, the skills, knowledge, expertise or efforts of the person who performed the services, or

· the materials supplied and/or tools and equipment used to complete the job. If the majority (more than 50%) of your income is for the skills, knowledge, expertise or efforts of the person who performed the services, this income will be classified as PSI.

The Relevance of Personal Services Income

The alienation measure only applies to income earned mainly from the provision of an individual's labour or skills (personal services income) rather than being generated by the use of assets, the sale of goods, the granting of a right to use property or by a business structure.

By definition, income earned by an employee is personal services income. However, the measure does not apply to employees, except where an individual is an employee of an interposed entity.

The alienation measure will not apply where the income is earned in the course of conducting a personal services business. The meaning of personal services business is explained in Taxation Ruling TR 2001/8.

You will not be within the alienation measures and can self-assess accordingly if you come within one of the following four situations, a per Section 87-5 of the ITAA 1997:

You satisfy the 'results test', that is:

(a) You work to produce a result(s); and

(b) You provide the tools and equipment necessary (if any) to produce the result(s); and

(c) You are liable for the cost of rectifying any defective work.

1. None of your clients pay you 80% or more of your personal services income in the year of income and you have two or more unrelated clients (who were obtained as a result of you making offers to the public at large or to a section of the public).

(a) None of your clients pay you 80% or more of your personal services income in the year of income, and

(b) You engage an individual(s) or an unrelated entity(ies) to perform 20% or more (by market value) of the principal work (ie the work that generates the personal services income), or

(c) You have an apprentice for at least half the year.

2. None of your clients pay you 80% or more of your personal services income in the year of income, and you exclusively use business premises that are physically separate from your home, or from the premises of the person for whom you are working.

If you cannot satisfy any of the tests outlined in the previous paragraph (for example, because you do not meet one of the three personal services business tests, or the results test, and 80% or more of your personal services income is from one source), you may be able to obtain a Personal Services Business Determination (PSBD) from the Commissioner that you are conducting a personal services business.

You can also apply for a PSBD if you are not sure whether you satisfy any of the tests. If the Commissioner is satisfied that you are entitled to a PSBD, you will not be subject to the alienation measure.

Even if an amount of income is personal services income, the alienation measure will not apply where that personal services income is earned in the course of conducting a personal services business (i.e., where you meet one of the tests in paragraph 6 or you have a PSBD).

In your case, you work as a consultant in your area of expertise and plan to start conducting this work as a sole trader to Australia clients.

You estimate that 80% of your time is spent using your knowledge, skills and expertise in your consultancy work. In order to perform your work, 20% relates to the use of other resources.

Therefore, when conducting your consultancy skills as described, more than 50% of your income earning activities relates to the use of your skills, knowledge, expertise or efforts, any income received from these activities will be considered Personal Services Income.

You had one overseas client whilst conducting this consultancy work, thus receiving 80% or more of your income from one client. You were paid an hourly rate and as such do not satisfy the results test.

You may apply for a Personal Services Business Determination if you do not believe the alienation measures should apply to your personal services income.

Further issues for you to consider:

You can apply for a PSBD online at ato.gov.au. instructions and the relevant form are contained online and can be found by entering "Personal services business determination" in our search box.

Personal services income in the 2012 income tax assessment needs to be declared by following the steps contained on our website. To access these steps you can type into our search box: 14 - Personal services income (PSI) 2012.