Edited version of private advice

Authorisation Number: 1012652892836

Ruling

Subject: Residency and assessability of foreign income

Questions and answers

1. Are you treated solely as a resident of country X under the double tax agreement between country X and Australia?

Yes.

2. Is your foreign employment remuneration exempt from tax in Australia under Articles X and Y of the double tax agreement between country X and Australia?

Yes.

3. Does either Article W or Article Z of the double tax agreement between country X and Australia apply to any part of your foreign employment remuneration?

No.

This ruling applies for the following periods:

Year ending 30 June 2014

Year ending 30 June 2015

Year ending 30 June 2016

The scheme commences on:

1 July 2013

Relevant facts and circumstances

The Commissioner has issued you with a private ruling stating that you will continue to be a tax resident of Australia while you are working overseas.

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

You were the principal of an Australian firm before you relocated to country X for work purposes.

Your spouse left Australia to live with you in country X.

Your relocation to country X has involved a leave of absence from your Australian employer and the entering into of an employment agreement with company Z.

Company Z is a country X private company limited by shares based solely in country X.

You will be present in country X for at least 183 days for a continuous period over two years in the relevant calendar years. As a consequence, you will be treated as a country X resident for country X income tax purposes.

Whilst living in country X, you will exercise your employment duties outside the country for part of the year.

You will be taxed in each calendar year pursuant to the relevant scheme under the domestic tax law of country X.

Under the scheme, an exemption will be given for part of your employment income in accordance with the calculation set out in the domestic tax law of country X.

Under the scheme, the tax exemption is calculated in regard to the number of days an individual exercises their employment outside country X as opposed to the number of days the individual exercises his employment in country X.

You have opened two bank accounts and obtained two credit cards in country X.

You entered into a lease of an apartment in country X.

The apartment is furnished largely with furniture and effects you shipped from Australia.

You and your spouse sold your Australian residence.

Aside from returning to Australia from time to time to discharge your duties, you do not intend to visit Australia, and if you do it will only be on rare occasions.

Your spouse will return to Australia more often so that they can spend time with other family members.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

International Tax Agreements Act 1953 Section 4

International Tax Agreements Act 1953 Section 5

Income Tax (International Agreements) Bill 1969

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

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

The double tax agreement with country X (the country X agreement) is listed in section 5 of the Agreements Act. The country X agreement operates to avoid the double taxation of income received by residents of Australia and country X.

1) Residency under the country X agreement

In your situation, you are a resident of both country X and Australia for tax purposes under the domestic laws of each country. Therefore, it is necessary to refer to the 'tiebreaker' rules contained in the country X agreement to determine whether you will be treated solely as a country X resident or an Australian resident.

An article of the country X agreement states that where an individual is both a country X resident and an Australian resident:

(a) he shall be treated solely as a country X resident-

(i) if he has a permanent home available to him in country X and has not a permanent home available to him in Australia;

(ii) if sub-paragraph (a)(i) of this paragraph is not applicable but he has an habitual abode in country X and has not an habitual abode in Australia;

(iii) (iii) if neither sub-paragraph (a)(i) nor sub-paragraph (a)(ii) of this paragraph is applicable but the Contracting State with which his personal and economic relations are closest is country X;

(b) he shall be treated solely as an Australian resident-

(i) if he has a permanent home available to him in Australia and has not a permanent home available to him in country X;

(ii) (ii) if sub-paragraph (b)(i) of this paragraph is not applicable but he has an habitual abode in Australia and has not an habitual abode in country X;

(iii) (iii) if neither sub-paragraph (b)(i) nor sub-paragraph (b)(ii) of this paragraph is applicable but the Contracting State with which his personal and economic relations are closest is Australia.

In Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements, the Commissioner accepts that it is appropriate to have reference to the OECD Model Tax Convention and Commentary (OECD Commentary) which provides guidance on the interpretation of the terms used in double tax agreements.

In relation to a 'permanent home', the OECD Commentary states that:

….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.

As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.).

In your situation, you have leased and furnished an apartment in country X in which you and your spouse will live while you are based in that country. You have also sold your former residence in Australia and consequently no longer have a home available to you in Australia.

Based on the above, it is evident that you have a permanent home available to you in country X and do not have a permanent home available to you in Australia.

Therefore, you will be treated solely as resident of country X under the country X agreement.

2) Assessability of employment income under Articles X and Y of the country X agreement

Article X of the country X agreement deals with the taxation of remuneration in respect of personal services, and states:

……. remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services shall be subject to tax only in that Contracting State unless the services are performed or exercised in the other Contracting State. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, that other Contracting State.

Article Y of the country X agreement deals with the taxation of remuneration in respect of where personal services are performed in the other contracting state, and states:

Remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services performed or exercised in the other Contracting State shall be exempt from tax in the other Contracting State if:

(a) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the year of income or in the basis period for the year of assessment as the case may be of that other Contracting State;

(b) the services are performed or exercised for or on behalf of a person who is a resident of the first-mentioned Contracting State; and

(c) the remuneration or other income is not deductible in determining the profits for tax purposes in the other Contracting State of a permanent establishment in that other Contracting State of that person.

In your situation, you are a resident of country X under the country X agreement, are employed by a country X company and will return to Australia from time to time as part of your employment duties.

Applying Article X to your situation, the remuneration you derive from your employer will only be subject to tax in country X unless you perform services in Australia that meet the criteria specified in Article Y.

However, Article Y will not apply to you as:

(a) you will not be present in Australia in any of the relevant income years for 183 days or more;

(b) you will perform the services for or on behalf of an employer who is a resident of country X; and

(c) the remuneration will not be deductible in determining the profits for tax purposes in Australia of a permanent establishment in Australia of your employer.

Therefore, the remuneration you derive in country X from your employer will only be subject to tax in country X and will be exempt from tax in Australia under Articles X and Y of the country X agreement.

3) Application of Article W & Article Z of the country X agreement

Article W of the country X agreement

Article W of the country X agreement states:

Where under this Agreement income is relieved from tax in one of the Contracting States and, under the law in force in the other Contracting State, a person, in respect of the said income, is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the relief to be allowed under this Agreement in the first-mentioned Contracting State shall apply only to so much of the income as is remitted to or received in the other Contracting State.

As explained in the explanatory memorandum to the Income Tax (International Agreements) Bill 1969, the purpose of Article W of the country X agreement is to ensure that Australia is not to exempt or reduce its tax on income that is not subject to country X tax because it is not remitted to or received in country X:

…… relates to provisions of the country X law which have no counterpart in Australian taxation law. A person resident in country X is taxed there on foreign-source income only if the income is remitted to or received in country X. ……… will ensure that Australia is not to exempt or reduce its tax on income that, because it is not remitted to or received in country X by the country X resident who derives it, is not subject to country X tax.

In your case, part of your employment income will be exempt from tax in country X in accordance with the calculation set out in the domestic tax law. The exemption is calculated with reference to the number of days an individual exercises their employment outside country X as opposed to the number of days the individual exercises his employment in country X.

Consequently, it is evident that the basis of taxation or non-taxation of your employment remuneration in country X is not related to whether it is remitted to or received in country X.

Therefore, Article W of the country X agreement does not apply to any part of your foreign employment remuneration.

Article Z of the country X agreement

Article Z of the country X agreement applies to a person who is a resident of Australia and is also a resident of country X, as follows:

Where such a person is treated for the purposes of this Agreement solely as a resident of one of the Contracting States he shall be exempt in the other Contracting State from tax on any income in respect of which he is subject to tax in the first-mentioned Contracting State if the income is derived:

(a) from sources in the first-mentioned Contracting State; or

(b) from sources outside both Contracting States.

Income is 'subject to tax' if tax has been paid or tax is to be paid on that income. It follows that the portion of your employment remuneration that is exempt from tax in country X is not subject to tax in country X. Therefore, Article Z does not apply to the exempt portion of your income which means that Australia could potentially have the right to tax this income.

However, one of the purposes of Article Z is to allocate taxing rights to income that is not specifically caught by any of the other Articles of the country X agreement.

In your case, it has already been established that country X has the sole right to tax your foreign employment remuneration under Articles X and Y of the country X agreement.

Therefore, Article Z of the country X agreement will not apply to any part of your foreign employment income.