Edited version of your private ruling

Authorisation Number: 1012452248569

Ruling

Subject: Residency and Source of income

Questions and answers

1. Are you an Australian resident for tax purposes from the date you departed Australia?

Yes.

2. Are the salary and wages derived by you overseas, Australian sourced and required to be included in your Australian tax return?

Yes.

This ruling applies for the following period:

Year ending 30 June 2012.

The scheme commenced on:

1 July 2011.

Relevant facts and circumstances

You are a citizen of Australia.

You are a citizen of Country X but never lived there.

You left Australia on a date in 20XX with intentions to travel.

You commenced work for a government agency located in Country Y in 20YY.

You were hired whilst outside Country Y.

You gained employment as a permanent employee but do not hold superfund membership of PSS.

You were hired to perform government functions, you were seeking to gain experience before returning to Australia.

You intend to return to Australia to work for a government department and perform similar government roles.

Your Australian bank accounts remain open.

Your family are Australian citizens who currently reside in Country X and they do not intend to reside there permanently. You also have family members living in Australia. Your closest friends live in Australia.

You do not own any property in Australia or overseas.

When you left Australia, you vacated your accommodation and put your belongings into storage or left items with family members. You have very few belongings with you in Country Y.

You are currently renting a room in a shared accommodation on a short term lease in Country Y.

You only intend to work overseas for a temporary period.

There is taxation treaty between the Australian Government and the overseas country.

The local tax authorities have determined that you are not liable to pay tax in Country Y.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Subsection 6-5

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

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Paragraph 6-5(3)(a)

International Tax Agreements Amendment Bill 2003 Article 1, 2,4,14,17,18 & 21.

Reasons for decision

An Australian resident is subject to taxation in Australia on income derived (directly or indirectly) from all worldwide sources. A foreign resident is only subject to taxation in Australia on income derived (directly or indirectly) from Australian sources, section 6-5 of the Income tax Assessment Act 1997 (ITAA 1997).

Residency and source of income for taxation in Australia

Section 995-1 of the ITAA 1997 defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of Subsection 6(1) 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 and permanent place of abode test,

· the 183 day test, and

· the superannuation test.

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual. If residency is established under this test, the remaining three tests do not need to be considered.

If residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test (Residence according to ordinary concepts)

This test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. The Macquarie Dictionary, [Multimedia], version 5.0.0, 1/10/01 defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

There have been several court cases where residence according to ordinary concepts has been examined in detail. Overall it has been established that residence includes two elements: physical presence in a particular place and the intention to treat the place as home, at least for the time being, not necessarily forever.

Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia (which contains the Australian Taxation Office (ATO) view on whether an individual who temporarily leaves Australia ceases to be Australian resident for income tax purposes) specifies that a person's place of abode is where they live.

You left Australia in 20XX to holiday and work overseas with firm intentions to return to similar employment in Australia. You have social, family, and financial ties with Australia.

Overseas you have employment as a government employee, but do not intend to work overseas beyond a year. You have short term rental arrangement overseas and few possessions with you.

You intend for the time being, to live and work in Country Y, and therefore will not be a resident of Australia under the resides test.

The domicile/permanent place of abode test

Under this test, a person whose domicile is in Australia will be considered a resident of Australia for taxation purposes, unless the Commissioner is satisfied the person's permanent place of abode is outside Australia.

A person's domicile is generally their country of birth. This is known as a person's domicile of origin. A person's domicile of origin will not usually change but can in some circumstances. For example, a person can acquire a domicile in another country by choice.

In order to acquire a domicile by choice outside of their domicile of origin, a person must have and be able to prove an intention to make their home indefinitely in a country outside their domicile of origin. Sufficient proof of such an intention is considered to exist in cases where a person becomes a citizen of a country outside of their domicile of origin.

Taxation Ruling IT 2650 specifies that a person with an Australian domicile who is living outside Australia will retain their Australian domicile if they intend to return to Australia on a 'clearly foreseen and reasonably anticipated contingency' - at the end of a specific period of time for example.

In your case, you were born in Country X and hold citizenship there. You never lived in Country X and have gained Australian citizenship. You have close family, social and financial ties in Australia. Accordingly, your domicile of origin is Country X, however you have taken steps to legally change your domicile to Australia.

As a result, you will be a resident of Australia for taxation purposes under the domicile and permanent place of abode test unless the Commissioner is satisfied your permanent place of abode is outside Australia.

IT 2650 specifies that a permanent place of abode does not have to be everlasting or forever and does not mean an abode in which a person intends to live for the rest of their lives.

IT 2650 also specifies that a period of two or more years is generally considered sufficient to support the establishment of a permanent place of abode outside of Australia and that an intention to return to live in Australia permanently does not prevent a taxpayer setting up a permanent place of abode elsewhere in the meantime.

Conclusion

In your case, we consider you have not established a permanent place of abode overseas because:

· You have short term accommodation only, taking few possessions with you,

· You have firm intentions to return to Australia, and

· Your family did not accompany you to Country Y.

The Commissioner is not satisfied that you have established a permanent place of abode in Country Y, and you have retained your Australian domicile. As a result, you have been a resident of Australia for taxation purposes under this test for the period you left Australia to travel and live overseas.

Source of income

Source can refer to either the geographical source, such as a country or the classification of certain income, for example dividends or income from personal exertion.

The relevant source rules are a combination of both statutory rules and certain common law principles that have been established over a number of years. Salaries and wages are ordinary income for the purposes of section 6-5 of the ITAA 1997 (Hayes v FC of T (1956) CLR 47; [1956] HCA 21; Scott v FC of T (1966) 17 CLR 514; [1966] HCA 48).

Ordinarily, the source of salaries and wages derived by an employee is the place at which the services are performed (Federal Commissioner of Taxation v French (1957) 98 CLR 398; [1957] HCA 73). In the case of wages paid by a government to one of its employees, see also FC of T v Efstathakis [1979] FCA 28 (1979) 9 ATR 867; (1979) 79 ATC 4256.

Therefore, applying the above common law, the salary or wages derived by you would normally be sourced in Country Y as you have rendered the services in respect of employment there. Under paragraph 6-5(3)(a) of the ITAA 1997, this would mean that the salary and wages you derive in the present case would normally be included in your assessable income. However, in determining a resident's liability to Australian tax, it is necessary to consider the applicable Double Tax Agreement.

Effect of the Double Tax Agreement

The applicable Double Tax Agreement is the Convention between the Government of Australia and the Government of Country Y for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains. This agreement came into force prior to 2010.

The persons covered by this convention are namely residents of Australia, or Country Y or both, article 1. Article 2 refers to the taxes covered, which includes income tax.

A person will be a resident of Country Y if they are a resident for the purposes of the Country Y tax and in the case of Australia, if the person is a resident of Australia for the purposes of Australian tax, article 4.

Article 14 discusses income from employment, such as salaries, wages and other similar remuneration. Where these amounts are derived by a resident of Australia, these amounts are only taxable in Australia unless the employment is exercised in Country Y.

Where an Australian resident derives employment income in Country Y, such remuneration may be taxed in Australia. This is subject to articles 17 and 18.

TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements explains that the phrase 'may be taxed' normally means that the country mentioned (the source country, in this case Country Y) has a non-exclusive entitlement to tax the income. Under normal international tax principles, the other (residence) country may also continue to tax its residents.

Article 18 considers the taxation of salaries, wages and other similar remuneration, other than a pension or annuity derived from Government service. Where paid by Australia or a political subdivision or local authority to an individual in respect of services rendered in the discharge of governmental functions shall be taxable only in Australia.

However, these amounts will only be taxable in Country Y if the services are rendered in Country Y and the recipient is a resident of Country Y who:

(a) is a national of the Country Y; or

(b) did not become a resident of the Country Y solely for the purpose of rendering the services.

Also, article 18 will not apply where services rendered in connection with any trade or business carried on by Australia or a political subdivision or local authority of Australia.

Article 21 "source of income" states that income or gains derived by a resident of the Country Y which, under article 18, may be taxed in Australia shall for the purposes of the laws of Australia relating to its tax be deemed to arise from sources in Australia.

Conclusion

Accordingly, the salary or wages you derive from employment in the Country Y with a public sector organisation are included in your assessable income under subsection 6-5(3) of the ITAA 1997 because:

· the salary or wages are ordinary income;

· you are a 'Australian resident'; and

· the Double Tax Agreement does not prevent the taxation of salary or wages, derived by you from Australian sources.