Edited version of private advice

Authorisation Number: 1012623802557

Ruling

Subject: residency status

Question 1

Are you an Australian resident for taxation purposes?

Answer

Yes.

Question 2

Are your foreign business profits taxable in Australia?

Answer

No.

This ruling applies for the following periods

Year ending 30 June 2012

Year ending 30 June 2013

The scheme commenced on

1 July 2012

Relevant facts

The arrangement that is the subject of the private ruling is described below. This description is based on the following documents. These documents form part of, and are to be read with, this description. The relevant documents are:

• your correspondence and

• email.

You were born in Australia and are a citizen of Australia.

You are not a permanent resident of any other country.

You married several years ago.

You went to country A.

You and your spouse have started a foreign investment company in country A.

The relevant government have approved the establishment of the foreign company.

You and your spouse have also established another company in country A.

You have a residence visa and work permit for country A.

The visa and permit are contingent on the company remaining in existence. They will be renewed annually if the company remains in existence.

A house has been purchased on your behalf in country A and you have a written agreement with the legal owner as the relevant law.

You have purchased furniture and appliances for your home in country A. Prior to living in this house, you and your spouse leased accommodation.

You moved your two pets with you to country A.

You have friends and social connections in country A.

You have joined a sports club in country A. You also attend numerous social events in country A.

As you have been present in country A for more than 183 days in a 12 month period, you are considered to be a resident of country A under their laws relating to its tax.

You have family and friends remaining in Australia.

You ceased running your business in Australia.

You have returned to Australia several times since leaving. You return to Australian a few times per year to visit relatives and friends.

You and your spouse have not been a Commonwealth Government employee.

You have no children.

You sold your home and business in Australia before going to country A. You also sold your two motor vehicles prior to going to country A. You later sold your investment property.

You and your spouse started a business immediately prior to leaving Australia. Your business now trades under your foreign company.

You have business income from country A.

You have notified companies and authorities including the bank that you have moved to country A.

You cancelled your Australian health insurance.

You notified the Australian Electoral Commissioner to remove your name from the roll.

You operate bank accounts in Australia which are used when you and your spouse visit Australia. You also have an account that is used by your foreign company for Australian clients to pay directly into before the money is transferred to the foreign company account.

You do not have any other substantial assets in Australia.

Relevant legislative provisions

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

Income Tax Assessment Act 1936 Subsection 6(1).

Reasons for decision

Residency status is a question of fact.

The term Australian resident is defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) to mean a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Subsection 6(1) of the ITAA 1936 provides four tests to determine whether a person 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 Commonwealth superannuation fund 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 may still be considered to be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

The resides test

The Macquarie Dictionary defines reside as to dwell permanently or for a considerable time, have ones abode for a time.

The Shorter Oxford English Dictionary defines reside as to dwell permanently, or for a considerable time, to have ones settled or usual abode, to live in or at a particular place.

As a general concept, residence includes two elements: physical presence and the intention to treat the place as home. The period of physical presence in Australia is not by itself decisive when determining whether an individual resides here. All the facts and circumstances that describe an individual's behaviour in Australia are relevant in determining the residency status. No single factor is necessarily decisive.

Taxation Ruling TR 98/17 discusses the residency status of individuals entering Australia. As you are not a migrant or person entering Australia, this ruling does not apply to you, however some of the principles are relevant. As highlighted in TR 98/17 the quality and character of an individual's behaviour while in Australia assist in determining whether a person resides in Australia. All the facts and circumstances in relation to a person's behaviour in Australia are relevant. In particular the following factors are useful when describing the quality and character of an individual's behaviour:

• intention or purpose of presence,

• family and/or employment ties,

• maintenance and location of assets, and

• social and living arrangements.

Since the Commissioner published TR 98/17, there have been many more cases that have discussed residency status of Australians leaving Australia.

The resides test was considered in Iyengar v FCT 2011 ATC 10-222 (Iyengar's case). In that case, the taxpayer was considered to be residing in Australia even though he had a two year work contract to work overseas and only returned to Australia twice in that time. He was in Australia for a period of 14 days and then later for a period of 10 days during that time. It was highlighted that the term 'reside' should be given a wide meaning and that a person does not necessarily cease to be a resident because they are physically absent. The test is whether the person has retained a continuity of association with that place. Iyengar had the required continuity of association with Australia and was considered a resident under the resides test. It was also considered that he did not establish a permanent place of abode outside Australia.

Residence was also discussed in Joachim v FCT 2002 ATC 2088 (Joachim's case). In that case it was highlighted that the test is whether the person has retained a continuity of association with the place, together with an intention to return to that place and an attitude that the place remains home.

Recent case law considers the following factors relevant in determining the residency status of an individual.

Physical presence

The period of physical presence or length of time in Australia is not by itself decisive when determining whether an individual resides here. Equally important is the quality and character of an individual's behaviour while in Australia.

In your case, you intend to work in country A. You have returned to Australia a few times each year. During your time in Australia, you visit relative and friends.

Nationality

You were born in Australia. You entered country A with a residence visa and work permit which is valid for 12 months.

History of residence and movements

You have lived in Australia and are an Australian citizen.

Habits and mode of life

You have previously been living and working in Australia. You went to country A and have set up a business there. You have notified authorities that you have moved to country A.

Social and living arrangements

You have joined a sports club in country A. You have purchased furniture and appliances in country A. You sold both your cars previously owned in Australia.

Frequency, regularity and duration of visits to Australia.

You visit Australia a few times each year to visit family and friends.

Family and business ties

Family or business ties with a country are an important factor to be taken into account in determining whether or not a person has ceased to be resident in a particular country. The location of an individual's immediate family can be decisive (Joachim's case).

In Australia, family ties outweigh business ties where the two are in conflict (Shand v FC of T 2003 ATC 2080 (Shand's case)).

Your spouse has travelled with you to country A. You do not have any children. You have relatives and friends in Australia.

Your previous home, rental property, business and cars in Australia have been sold.

You have kept Australian bank accounts and use these when you visit Australia. You also have an Australian bank account that is used by your foreign company for Australian clients to pay directly into before the money is transferred to the foreign company account.

You have established two companies in country A. You have purchased a house in country A.

Maintenance of place of abode

You have not maintained your previous Australian residence.

Results of the resides test

You went to country A and intend to live there for some time.

While you will be spending most of your time in country A, this does not mean that you are no longer a resident of Australia. The period of time in Australia is only one relevant factor to consider.

It is acknowledged that unlike Iyengar's case, you do not have a spouse and dependent children in Australia and did not stay in your main residence when back in Australia. However, it remains that you have bank accounts and financial ties as well as relatives and friends in Australia. You will be returning to Australia to visit relatives and friends.

It is acknowledged that you have ownership rights in a property in country A. However as highlighted in Murray v FC of T [2012] AATA 557, the fact that the taxpayer had acquired a residential property overseas was not considered sufficient to establish that they were no longer a resident of Australia.

The fact that you have established companies in country A is also not a determining factor in determining your residency status. Your current visa is valid for 12 months only and will only be renewed if your company remains in existence.

While you have severed many of your Australia ties, it is considered that you still have financial and family ties with Australia.

In view of the decisions arising from recent case law, the Commissioner believes that you remain a resident of Australia for taxation purposes because you have maintained a continuity of association with Australia.

Although you will not be physically present for much of the time, after reviewing your full circumstances, it is considered that you are a resident of Australia under the resides test.

The domicile test and permanent place of abode

Whilst it is not necessary to meet more than one test to determine residency for tax purposes (we have already established that you a resident under the resides test), we will also include a discussion of the 'domicile 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 has only one domicile at the one time. A person retains the domicile of origin unless and until they acquire a domicile of choice in another country. Generally speaking, persons leaving Australia temporarily would be considered to have maintained their Australian domicile.

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, for example, through having obtained a migration visa. A working visa, even for a substantial period of time such as two years, would not be sufficient evidence of an intention to acquire a new domicile of choice.

You are an Australian citizen. Your domicile is Australia. Although you intend to live in country A, it is not considered that your domicile is there.

As your domicile remains in Australia, you will be considered an Australian resident unless the Commissioner is satisfied that you have a permanent place of abode outside of Australia.

Taxation Ruling IT 2650 examines the factors to be taken into account in determining whether a person who leaves Australia to live overseas ceases to be an Australian resident during the absence.

IT 2650 provides that the following factors are considered in determining a taxpayer's permanent place of abode:

• the intended and actual length of stay in the overseas country

• any intention to stay in the overseas country only temporarily and then either to return to Australia at some definite point in time or to travel to another country

• the establishment of a home outside Australia

• the abandonment of any residence or place of abode in Australia

• the duration and continuity of presence in the overseas country, and

• the durability of association with a particular place in Australia.

As highlighted in paragraph 25 of IT 2650, as a broad rule of thumb, a period of about two years or more would generally be regarded as a substantial period for the purposes of a taxpayer's stay in another country. It must be stressed, however, that the duration of the taxpayer's actual or intended stay out of Australia is not, of itself, conclusive and needs to be considered with all of the factors.

Paragraph 28 of IT 2650 highlights that the acquisition of a home in the overseas country would be a very relevant though not conclusive factor.

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. The nature and quality of use which a taxpayer makes of a particular place of abode overseas is important (FC of T v Applegate 79 ATC 4307; (1979) 9 ATR 899 Applegate's case).

The absence in Applegate's case was to be for an indefinite period and expected to be of a substantial length. However, more important is the durability of association with a particular place. Permanent place of abode connotes a more enduring relationship with the particular place of abode than that of a person who is ordinarily resident there or who has their usual place of abode there. Applegate did not have a residence in Australia and did not carry on business in Australia. He received no income from sources within Australia.

Unlike Applegate's case, you have bank accounts remaining in Australia. Applegate had only a life policy and hospital fund membership remaining in Australia. While your usual place of abode may be currently in country A, it is not considered that country A is your permanent place of abode. Your visa remains valid for only 12 months. Although it can be renewed if your company remains in existence, it remains that you do not have a long term stay visa for country A.

In FC of T v Jenkins 82 ATC 4098 (Jenkins case), the taxpayer was transferred to the New Hebrides for three years and would have applied for an extension after the three years if it had not been for illness. The taxpayer had tried to sell the family home before going overseas but was unable to find a buyer.

As highlighted in Applegate's case and Jenkin's case, a person's permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case.

In Case 12,551 (1998) 37 ATR 1263, it was highlighted that a mere long absence is not enough to divest oneself of resident status. The taxpayer had retained Australian investments and bank accounts.

Although it is your intention to live in country A, it is not considered that you have established a permanent place of abode outside Australia. This is supported by the following:

• your visa for country A is only valid for 12 months,

• you still have Australian clients for your business,

• there is no information to show you have extended family in country A,

• you have not closed all your bank accounts in Australia,

• your actions are not consistent with a person who has resolved to permanently leave Australia, and

• your ties and association with country A lack an enduring relationship.

It is acknowledged that you can renew your visa annually if your business remains and your spouse is with you in country A and you have a residence there. However, the nature and quality of your ties in Indonesia are not sufficient to show you have a permanent place of abode there.

As your domicile remains in Australia and the Commissioner is not satisfied that you have a permanent place of abode outside of Australia, you are considered to be a resident of Australia for income tax purposes under the domicile test. 

Australian tax liability

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

As you are an Australian resident for taxation purposes, your assessable income includes your income derived from both Australian and overseas sources.

In determining liability to tax for Australian residents, it is necessary to consider not only the income tax laws but also the laws under the International Tax Agreements Act 1953 (Agreements Act) and any applicable double tax agreement contained in the Australian Treaties Series (ATS).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. Subsection 4(2) of the Agreements Act provides that the Agreements Act overrides the ITAA 1997 where there are inconsistent provisions (apart from Australia's general anti-avoidance rules and certain provisions dealing with limitations of tax credits).

Article 4 of the relevant agreement discusses residence.

Article 4(1) of the agreement provides that a person is a resident of one of the Contracting States if the person is a resident of that Contracting State under the law of that State relating to its tax.

Article 4(3) provides rules where a person is a resident of both countries. Where a person is a resident of both Australia and country A, the person is deemed to be a resident solely of the Contracting State in which a permanent home is available to the person.

As you do not have a permanent home in Australia and have a permanent home available in country A, you are deemed to be a resident of country A under the agreement.

Under article 7 of the agreement, the profits of an enterprise of country A shall be taxable only in country A unless the enterprise carries on business in Australia through a permanent establishment situated in Australia.

As you have business profits from country A and don't have a permanent establishment in Australia, your foreign business profits are taxable only in country A.