Edited version of private advice

Authorisation Number: 1012636021591

Ruling

Subject: Residency

Question 1

Under the Double Tax Agreement with the Overseas Country and Australia are you an Australian resident?

Answer

Yes

Question 2

Under the Double Tax Agreement with the Overseas Country and Australia is your Overseas Country Pension Income only assessable in Australia?

Answer

Yes

Question 3

Under the Double Tax Agreement with the Overseas Country and Australia is your Overseas Country Rental Income assessable in Australia and eligible for a Foreign Income Tax Offset?

Answer

Yes

This ruling applies for the following period

30 June 2014

The scheme commences on

1 July 2013

Relevant facts and circumstances

You and your spouse were born in the Overseas Country.

You and your spouse migrated to Australia in 200X, and have been tax residents since (you were initially granted Permanent Residence in 200X but did not migrate until 200X).

You and your spouse became Australian citizens in 200X. You are both citizens of both countries.

You and your spouse are tax residents in Australia and you both spend the major part of each year in Australia (more than 183 days per year).

You will both also continue to be tax residents of the Overseas Country as you spend more than 90 days in each year in the Overseas Country.

You and your spouse think you may be Dual residents under the Overseas Country DTA.

In late 20xx you both became eligible for the Overseas Country applicable Pension which is paid to an Overseas bank account. You have declared the pension on your Overseas Country returns only.

You believe you have both been lodging your returns in accordance with the Overseas Country DTA. As a result your Overseas Country rental income has only been declared in the Overseas Country.

You were recently advised that this may be an incorrect conclusion and attempted to make a voluntary disclosure of this overseas income, at which point you were advised to lodge a ruling application.

In your first Overseas Country tax returns after becoming Australian residents you advised the Overseas Country Tax Authorities of your changed residency status. After this time you only declared your Overseas Country property income in the Overseas Country.

The Overseas Country Tax authorities asked you to obtain certification from the ATO that you had become tax resident in Australia. You subsequently provided this documentation to the Overseas Country authorities.

Since then you have continued to lodge Overseas Country returns in which you respectively declare only Overseas Country property income and more recently Overseas Country pension.

The format of the Overseas Country returns is such that you are required to declare full details of your tax residence position, including the number of days that you have spent in the Overseas Country. You declare yourselves to be dual residents but primarily resident in Australia. These returns have never been challenged.

You intend to spend most of each year at your home in Australia.

Family, social and sporting ties

your adult children live and work in Australia.

You have never been employed in Australia. You are both retired.

You enjoy travelling within Australia.

In Australia, you are both physically and socially active. You are actively engaged in the various sports and exercise.

You visit the Overseas Country each year to visit relatives and friends.

You have family in the Overseas Country, who you see when you are in the Overseas Country.

Your spouse has limited family in the Overseas Country who you see about once a year.

You both play only one type of sport (as compared to Australia) in the Overseas Country.

You spend most your time in the Overseas Country maintaining your house and garden in the Overseas Country.

You are busy when you are in the Overseas Country but not as physically and socially active as when you are in Australia.

Assets

You jointly own a home in Australia.

You jointly own a home in the Overseas Country purchased in 200X. You lived there after you left a different overseas location (where you previously lived and worked) from 200X to 200X.

Whenever you are in the overseas country you stay in your house.

Neither, your Australia or overseas country houses are rented, they are available for your use whenever you are in either country and are left unoccupied when you are not there.

You own the followings assets on a joint basis in Australia:

• Apartment

• Furniture

• Cars

• Bank accounts

• Underlying assets of SMSF

You own the followings assets on a joint basis in the Overseas Country:

• House at cost

• Furniture

• Cars

• Bank accounts

• Deposit with a private bank

• Listed securities

The following apartments have been managed and rented out by letting agencies overseas:

• Apartment 1(owned by your spouse),

• Apartment 2.

You also both receive interest and dividend income from your banks accounts and share portfolio respectively and declared in your Australian returns.

Other

Neither, you or your spouse have been employed by The Commonwealth of Australian Government.

You have your own Self-Managed Super Fund (SMSF).

You are not enrolled in any courses of study in Australia.

Whenever you have been required to complete Australian Outgoing Passenger Card you both write that you are an "Australian Resident Departing Temporarily".

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-5(3)

International Tax Agreements Act 1953 Section 4.

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 770-5

Income Tax Assessment Act 1997 Section 770-10

Income Tax Assessment Act 1997 Section 770-10(3)

Reasons for decision

Summary

You are an Australian resident under Article X of the Convention. You are assessable on your Overseas Country pension income only in Australia under Article XY of the Convention. You are assessable on your Overseas Country rental income in Australia and may be taxed in the Overseas Country under Article XZ of the Convention. You are eligible for a FITO on tax paid in the Overseas Country in Australia as per Article XYZ of the Convention and section 770-5 of the ITAA 1997.

Detailed reasoning

Residency under the Convention

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a foreign resident includes the ordinary income derived directly or indirectly from all Australian sources during the income year.

In determining liability to tax on Australian sourced income received by a foreign resident, it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

The Convention between the Government of Australia and the Government of the Overseas Country for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on income and on Capital Gains, 'The Convention' (also referred to as the Double Tax Agreement between the Overseas Country and Australia) discusses at Article X 'Residence' of persons residing in either or both contracting states.

This article is important in 3 scenarios:

1) In determining a conventions personal scope of application,

2) In solving cases where double taxation arises in consequence of double residence,

3) In solving cases where double taxation arises as a consequence of taxation in the State of residence and in the State of source or situs.

In your case you are a resident for tax purposes of the Overseas Country and Australia under respective domestic laws. In these situations the Convention provides tie breaker tests at Paragraph 3 of Article X;

"The status of an individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:

a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

b) if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;

c) if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement."

General Definitions of The Convention specifies that the term national for the Overseas Country's purposes includes any overseas citizen. In Australia a national includes an Australian citizen.

Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements at paragraphs 101 to 105 explains the Commissioner's view that the OECD Model Tax Convention and Commentaries are relevant to interpreting Australia's tax treaties.

A permanent home according to OECD commentary:

"means a place where the individual owns or possess a home; this home must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration."

You have a permanent home available to you in both countries, accordingly we need to determine with which country your personal and economic relations are closer (centre of vital interests). If this can be determined there will be no need to consider subparagraph b and c.

Factors to be considered when determining to which country an personal and economic ties are closer include:

• Family and social relations,

• Occupations,

• Political, cultural and other activities,

• Place of business, and

• Place form which property is administered and possessions kept.

For scenarios, such as yours, where a permanent home is available in both countries, preference is given to the country where the individual has a habitual abode and the individual stays more frequently. These stays will be relevant even when they are away from the home.

You have started that you a Dual resident but have not approached the contracting states to make a determination on your behalf. You have instead accepted that you are resident of the Overseas Country and Australia under domestic law and have paid your taxes accordingly claiming a credit where applicable.

Under the Convention you have a permanent home to you in the Overseas Country and in Australia. Your centre of vital interests is closer to Australia, namely due to:

• Your children live and work in Australia,

• You and your spouse have more significant social ties in Australia,

• You and your spouse have more significant sporting ties in Australia, and

• Less significantly but worth noting that you and your spouse have higher value of assets in Australia, including a self-managed super fund.

Thus arguably your habitual abode is in Australia and in addition, you spend more time in Australia each year.

Conclusion - Residency under the Convention

Under Article X of the Convention between Australia and the Overseas Country, it is considered you are an Australian resident for taxation purposes.

Assessability of Overseas Country State Pension

The main structural mechanism by which a Double Tax Agreement avoids double taxation is to 'distribute' or 'allocate' taxing rights over 'income' between those countries that are parties to the DTA and to require the 'residence' country to relieve double taxation for any 'source' taxation levied in accordance with the treaty. By this means they essentially reconcile competing domestic law taxing claims based on the residence of the taxpayer and the source of the income concerned.

The basis for the 'allocation' of taxing rights varies for different categories of income. For some categories of income the taxation right is reserved solely to the country of 'residence' (for the purposes of the DTA) of the taxpayer.

For other categories, the DTAs provide for both countries to tax the income (with in some cases the tax of the country of source being limited) with the country of residence providing relief for tax paid in the other country, thus avoiding double taxation. In some rare cases, the country in which the income is sourced may be given an exclusive taxing right.

DTAs provide that some types of income are to be taxed only by the country of residence of the recipient for the purposes of the DTA (the 'residence country').

A common example of a 'residence country-only' taxing right under a DTA is that provided for in relation to international shipping and airline profits, mainly because of the difficulties associated with determining the source of such profits. Most pensions are also taxable only in the country of residence of the pensioner under Australia's DTAs.

Article XY of the Overseas Country Convention considers pensions and annuities. Paragraph 1 includes government pensions, pensions and annuities paid to a resident of a country shall be taxable only in that country. Therefore, this is an example of residence country only taxation, and as previously determined you are an Australian resident under the Convention, and as such are only taxable in Australia on amounts of you Overseas Country Pension.

You have advised that you have been paying tax on your pension in the Overseas Country only. You should contact the Overseas Country tax authorities to resolve this matter.

Assessability of Overseas Country Rental Income

Article XZ of the Overseas Country Convention considers income from real property. Income derived by a resident of a country from real property may be taxed in the country in which the real property is situated. Real property includes property available for lease or rental such as in your case.

DTA's allocate taxing rights to countries on a 'shall be taxable only' or 'may be taxed' basis. The word 'only' denotes the allocation of an exclusive taxing right over the particular income type (Chong v FC of T 20 2000 ATC 4315). The latter formula ('may be taxed') does not itself affect the taxing right of the other country, although, the Methods of Elimination of Double Taxation Article may require the residence country to give relief by means of a credit or exemption.

Under normal international tax principles, the other (residence) country may also continue to tax its residents (where its domestic law so provides) on the income, wherever sourced, unless the DTA explicitly prevents it from doing so.

According to Australian domestic tax law, an Australian resident is taxable on their worldwide income from all sources under section 6-5 of the ITAA 1997. Therefore, your Overseas Country rental income will be taxable in Australia, but may also be taxable in the Overseas Country.

You have advised that you have been paying tax on your pension in the Overseas Country only. Article XYZ Elimination of Double Taxation of the Overseas Country Convention specifies that where an Australian resident has paid Overseas Country tax, a credit against Australian tax payable is allowable.

Eligibility for a Foreign Income Tax Offset

To prevent the double taxation of foreign sourced income that has been taxed in another country, resident taxpayers may be entitled to a non-refundable tax offset for foreign income tax paid on an amount included in their assessable income as per section 770-5 of the ITAA 1997.

The tax offset is limited to the lesser of foreign income tax paid and the foreign tax offset cap (the cap).  The cap is the amount of Australian income tax payable on that foreign income.  In the event that the total foreign income tax paid exceeds the cap, no offset or deduction is allowed for that amount of the foreign income tax that exceeds the cap.  

The foreign income tax offset (FITO) is a non-refundable tax offset.  The offset is applied to the income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess amount of foreign tax that cannot be recouped as an offset in an income year is not refunded.  It also cannot be carried forward. 

To be entitled to a foreign income tax offset:

• you must have actually paid, or be deemed to have paid, an amount of foreign income tax

• the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes (section 770-10 of the ITAA 1997).

There is an exception for certain residence based foreign income taxes as per section 770-10(3) of the ITAA 1997; an amount of foreign income tax you paid does not count towards the FITO where you paid it:

(a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and

(b) in respect of an amount derived from a source outside that country.

Differences between the Australian and foreign tax systems may lead to your paying foreign income tax in a different income year from that in which the income or gain is included in your assessable income for Australian income tax purposes. You might have paid the foreign tax in an earlier or later income year. However, the offset can only be claimed after the foreign tax is paid.

If you paid foreign income tax after the year in which the related income or gains have been included in your Australian tax return, you can claim the offset by requesting an amended assessment for that year. You have up to four years to request an amendment to your assessment from the date you paid the foreign income tax. You should also request an amendment if there is an increase or reduction in the amount of foreign income tax you paid that counts towards the offset.

In your case, you have paid foreign tax in the Overseas Country on income from real property relating to rental property's there. However you are also assessable on this rental income in Australia. As the DTA allows for a tax credit in Australia we have considered Australia's domestic FITO laws, and concluded that you are entitled to FITO on your rental income sourced in the Overseas Country and taxable in the Overseas Country and Australia.

For more information about calculating a FITO see our website.