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Ruling

Subject: Residency

Questions and answers:

Are you a resident for taxation purposes from the time of leaving Australia in 2012 until mid 2013?

Yes.

Is your foreign employment income exempt?

No.

This ruling applies for the following period:

Year ended 30 June 2013.

The scheme commenced on:

1 July 2012.

Relevant facts:

You are a citizen of Australia, and your country of origin is Australia.

You departed Australia in 2012.

You resigned from your previous employment effective before you left Australia in 2012.

You are now re-employed but being financed by a different entity, to undertake work for this entity.

Your employment contract overseas is based on a standard template. The contract has no set end date specified.

You will be engaged in continuous foreign service directly attributable to the delivery of Australian official development assistance (ODA) for more than 91 days.

You have an Overseas "Official Visa" valid until the latter part of 2014.

You intend to return to Australia at the conclusion of your employment.

Your visa lasts for two years and you expect that your job will last that long. At present your plan is to return to Australia at that time if your visa expires and is not renewed, and/or if your employment does not continue for reasons not related to your visa.

You intend to use your annual leave over the next two years to return to Australia in order to visit your family and pursue other responsibilities.

You do not intend to have a permanent place of residence. At present you are renting a single room studio apartment in a private house overseas. You may move to a larger rental property in time.

Your local salary is currently paid into an everyday account held in your name overseas. Any savings from your local salary in this account will constitute your only overseas assets. All your other assets are held in Australia.

For the three years prior to travelling overseas, you rented a family owned property. That property is now rented to someone else.

You have an investment property which is currently rented out.

You also have some shares.

No family accompanied you overseas. You have no spouse or children. Your immediate family and closest friends live in Australia and you are in regular email and phone contact with them.

You do not have any social or sporting connections overseas as yet. You only recently arrived and have not yet established many friendships nor joined any clubs or organisations.

You will continue to receive and attend to mail addressed to your Australian residence, which has been forwarded on to your overseas location, for the duration of your overseas service.

You may also be required to return to Australia during the period of foreign service to undertake work duties in Australia which are directly related to the foreign service.

The position may involve time working in multiple countries in the regions adjoining your location for overseas work. The time spent in countries other than your base country for employment purposes will be on an ad hoc basis as required with the employment primarily being undertaken from your base country.

You will not be paying any overseas tax. You have received advice that as an employee of your type who is not a Permanent Resident of your overseas location, you are exempt from the relevant overseas tax.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Section 23AG

Income Tax Assessment Act 1936 Section 23AG(2)

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'.

In your case,

· you departed Australia in 2012,

· you are employed in an overseas location,

· you have intentions to return to Australia at the end of your employment overseas, you intend to make regular visits to Australia to visit family and pursue your other responsibilities,

· you do not intend to have a permanent place of residence. At present you are renting a single room studio apartment in a private house. You may move to a larger rental property in time.

· your only assets overseas is a bank account,

· for the three years prior to locating overseas, you rented a family property. (That property is now rented to someone else.)

· you own an investment property in Australia which is currently rented out.

· you retired from active sports many years ago. Your immediate family and closest friends live in Australia and you are in regular email and phone contact with them.

· you do not have any social or sporting connections overseas as yet.

· you will continue to receive and attend to mail addressed to your Australian residence, which has been forwarded on to your overseas location, for the duration of your overseas service.

Therefore, you are not considered to have a settled or usual abode in Australia and are not considered to be residing in Australia under the resides test.

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 are a citizen of Australia, and your country origin is Australia. You have an overseas work visa valid until the latter part of 2014.

As such we do not consider that you have made efforts to change your domicile by legal or other means and will be a resident of Australia unless you can demonstrate to the Commissioner you satisfy the permanent place of abode test.

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 do not intend to have a permanent place of residence. You may move to a larger rental property in time.

· you have not yet joined any sporting teams and intend to return to Australia regularly for holidays and business related activities.

· you own a property in Australia which is rented out.

· your visa is valid for only a couple of years.

Although you intend to return to Australia your contract has no set end date.

Therefore, the Commissioner is not satisfied that you have established a permanent place of abode overseas and as such, you will be a resident of Australia under the domicile test.

The 183-day test

You are not a resident under this test as you will not be physically present in Australia for more than 183 days between when you go and return from Australia in the relevant income years.

Conclusion

As your domicile is Australia and you have failed to satisfy the Commissioner that you have a established a permanent place of abode overseas, you will be a resident of Australia for taxation purposes.

Accessibility of income - Section 23AG of the Income Tax Assessment Act 1936

Under the provisions of Section 23AG of the Income Tax Assessment Act 1936 (ITAA 1936), foreign earnings derived by an individual who is a resident of Australia for taxation purposes are exempt from income tax in Australia provided certain conditions are met. These conditions include:

· there must be a continuous period of foreign service of not less that 91 days, and

· that continuous period of foreign service must be directly attributable to, amongst other things, the delivery of Australian official development assistance by the person's employer (paragraph 23AG(1AA)(a) of the ITAA 1936).

Section 23AG of the ITAA 1936 defines:

· 'foreign earnings' as including income consisting of salary, wages, commission, bonuses or allowances,

· 'foreign service' as including service in a foreign country in the capacity of an employee, and

· 'employee' as including a person employed by a government or an authority of a government or by an international organisation.

The term 'Australian official development assistance' contained in paragraph 23AG(1AA)(a) is not defined for the purposes of section 23AG. However, the Explanatory Memorandum to the Tax Laws Amendment (2009 Budget Measures No. 1) Bill 2009 (the Explanatory Memorandum) introducing subsection 23AG(1AA) provides guidance on the meaning of the phrase.

Paragraph 1.19 of the Explanatory Memorandum states that 'Australian official development assistance' (ODA) is 'assistance delivered through the Australian Government's overseas aid program, as administered by the Department of Foreign Affairs and Trade and/or the Australian Agency for International Development (AusAID)'. The Explanatory Memorandum does not elaborate on the meaning of 'assistance' in this context.

However, the foreign earnings of individuals engaged in foreign service will not be exempt if one of the conditions for non-exemption contained in subsection 23AG(2) applies.

Subsection 23AG(2) applies, to deny an exemption, if the foreign earnings are exempt from tax in the foreign country only because of one or more of the following reasons:

· a double tax agreement with Australia or a law giving effect to a double tax agreement (paragraphs 23AG(2)(a) and 23AG(2)(b) of the ITAA 1936);

· a law of that foreign country which generally exempts from, or does not provide for, the imposition of tax on income derived in the capacity of an employee, income from personal services or any other similar income (paragraphs 23AG(2)(c) and 23AG(2)(d) of the ITAA 1936), or

· a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations (paragraphs 23AG(2)(e), 23AG(2)(f) and 23AG(2)(g) of the ITAA 1936).

In your case, your foreign income is exempt from tax overseas because of your employment status.

As such subsection 23AG(2) applies to deny you an exemption under 23AG as your foreign earnings are exempt from tax overseas only because of "a law or international agreement dealing with privileges and immunities of diplomats or consuls or of persons connected with international organisations".

You will be taxable in Australia at resident rates.