Edited version of private advice

Authorisation Number: 1012654862172

Ruling

Subject: Residency for tax purposes

Questions and answers

1. Are you a temporary resident for Australian tax purposes?

Yes.

2. Is your foreign sourced income assessable in Australia?

No.

3. Are you a resident of Australia for Australian domestic tax law purposes?

Yes.

4. Is your Australian sourced income assessable in Australia under domestic Australian tax law?

Yes.

5. Are you a resident of Australia for the purposes of the double tax agreement between Australia and Country X?

No.

6. Is your Australian sourced income assessable in Australia under the double tax agreement between Australia and Country X?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ending 30 June 2015

The scheme commenced on:

1 January 2013

Relevant facts and circumstances

You are a citizen of Country X.

You entered Australia in 2012.

You hold a 457 temporary visa.

Your spouse accompanied you to Australia and also holds a 457 temporary visa.

You intend to apply for permanent residency before your current visa expires.

Since coming to Australia, you have left Australia for a number of short trips for work purposes and for a holiday.

You purchased a home in Australia in 2013.

You sold your home in Country X in 2011.

You also have bank accounts, furniture and personal effects in Australia.

Your only remaining assets in Country X are two bank accounts.

Your only foreign sourced income is royalties from Country Y and Country X.

You have established social connections in Australia.

You have friends and family in Country X.

You are a resident of Country X for Country X tax purposes.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 768-910

Income Tax Assessment Act 1936 Subsection 6(1)

Reasons for decision

Temporary residency

A temporary resident is a person who holds a temporary visa under the Migration Act 1958 (section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)). A temporary visa is one that enables a person to remain in Australia during a specified period, or until a specified event occurs, or while the holder has a special status.

A person may be a temporary resident irrespective of whether they are a resident or a non-resident under the normal tax rules. However, a person will not be a temporary resident if they are residents under the separate test laid down in the Social Security Act 1991. In effect, this means that they cannot be an Australian-resident citizen, permanent resident, or person who holds a protected special category visa. The rationale for excluding protected special category visa holders is that they are entitled to government benefits on a similar basis to citizens. A person also cannot be a temporary resident if their spouse is a resident for social security purposes.

In your case, you hold a 457 temporary visa. You therefore cannot be a resident under the Social Security Act 1991. Likewise, your spouse also holds a 457 temporary visa and also cannot be a resident under the Social Security Act 1991.

Therefore, you meet the requirements of temporary residency.

As you are a temporary resident, we are unable to issue you with a Certificate of Residency.

Assessability of foreign income

In general, foreign-source income derived by a temporary resident will not be assessable income (section 768-910 of the ITAA 1997). This applies, for example, to foreign source dividends, interest or rental income.

In technical terms, the income covered by the exemption is called "non-assessable non-exempt income". This basically means that it is excluded from assessable income and is not taken into account when working out a taxpayer's losses.

This also means that expenses incurred in deriving the income will not be deductible, and that foreign tax offsets/credits cannot be claimed for foreign tax paid on the income.

In your case, you earn royalties from Country Y and Country X. As you are a temporary resident of Australia, this foreign sourced income is not assessable to you in Australia. As this income is not sourced in Australia, it is also therefore not subject withholding tax.

Assessability of Australian income

Section 6-5 of the ITAA 1997 provides that ordinary income, such as salary and wages, that is sourced in Australia, is assessable in Australia, regardless of whether the taxpayer is a resident or a non-resident for tax purposes.

In your case, you are living and working in Australia and earning salary and wages as an employee.

Your Australian salary and wages is therefore assessable income to you in Australia and must be included in your income tax returns.

Residency for tax purposes

As explained above, a person may be a temporary resident irrespective of whether they are a resident or a non-resident under the normal tax rules. Although you are a temporary resident, it is also necessary to determine whether you are a resident or non-resident under the normal rules, as this determines the rates of tax that will apply to your Australian sourced income, which is assessable to you in Australia.

Generally 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 within the tax provisions and provides four tests to ascertain the residency status. 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'.

The primary test is examined in Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia, a copy of which is available from our website www.ato.gov.au.

Given regard to your circumstances as a whole and a consideration of the primary residency test, it is accepted that you are a residing in Australia according to the ordinary meaning of the word 'resides' and therefore you are a resident of Australia for tax purposes.

As you are a resident of Australia for tax purposes, your Australian sourced income is taxed at resident rates. These rates vary from year to year. The rates of tax are available from our website.

Operation of double tax agreement between Australia and Country X

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements (DTAs).

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the 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).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country X DTA is listed in section 5 of the Agreements Act.

The Country X agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The Country X DTA operates to avoid the double taxation of income received by residents of Australia and Country X.

As you are a resident of both Australia and Country X for each country's respective domestic tax laws, we need to determine your residency status for the purposes of the DTA.

The article of the DTA that considers residency states that a person is not a resident of a Contracting State for the purposes of this Convention if the person is liable to tax in that State in respect only of income from sources in that State.

In your case, as explained above, as a temporary resident of Australia, only your Australian sourced income is assessable in Australia.

Therefore, in accordance with this article the DTA, you are not a resident of Australia for the purposes of the DTA.

Under the article of the DTA that considers employment income, both Australia and Country X have taxing rights to the income you earn in Australia. As previously explained, the income you earn in Australia is also assessable in Australia under Australian domestic tax law.