Edited version of your written advice

Authorisation Number: 1012660928312

Ruling

Subject: Residency

Question 1

Is the Taxpayer a resident of Australia in respect of the income years ending 30 June xxxx to 30 June yyyy, for the purposes of section 6(1) of the ITAA 1936?

Answer

No. In respect of the income years ending 30 June xxxx to 30 June yyyy, the Taxpayer is not considered to be a resident of Australia for the purposes of section 6(1) of the ITAA 1936.

This ruling applies for the following periods:

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

The scheme commences on:

The scheme has commenced

Relevant facts and circumstances

The Taxpayer was born in Australia.

The Taxpayer maintained a residence in Australia in which the Taxpayer lived with the Taxpayer's spouse and child.

The Taxpayer relocated to Country X in the zzzz income year.

The Taxpayer intends to remain in Country X for a period of three to five years. Currently, the actual length of the Taxpayer's stay in Country X is a few years prior to the private ruling application.

The Taxpayer has cut off many ties with Australia including cancelled a Medicare card; cancelled subscriptions; resigned as secretary and public officer of a family company; disengaged several professional associations and removal from the Australian Electoral Role.

Continuing Australian Association

Family

The Taxpayer's spouse and child moved to Country X to live with the Taxpayer.

The Taxpayer has a mother, siblings, mother-in-law and sister-in-law living in Australia.

Assets

The Taxpayer has retained ownership of a main residence in Australia, however the Taxpayer intends to sell this residence as soon as the property market improves to an acceptable level.

Australia will remain the Taxpayer's domicile.

Country X associations

The Taxpayer has entered into a residential lease on a property in Country X for three years and has paid three years advance rent.

The Taxpayer has registered for private health insurance and used the services of a local doctor and dentist in Country X.

The Taxpayer has engaged the services of an accountant and lawyer and opened a bank account in Country X.

The Taxpayer has enrolled their child in a local school in Country X.

The Taxpayer has obtained a Country X drivers licence and arranged entry into the Country X taxation system.

The Taxpayer has joined a private gym in Country X

The Taxpayer has registered as a voter with the Country X electoral office.

The Taxpayer has made a few short trips to Australia in the two prior income years, no longer than two weeks in duration nor more than 40 days in total in each income year.

The Taxpayer may in the future make short trips to Australia to see the Taxpayer's extended family. These trips are not expected to last any longer than one or two weeks and are likely to coincide with the school holiday periods in Country X to enable the Taxpayer to be accompanied by the Taxpayer's spouse and child.

The Taxpayer has arranged for Australian family members to visit them in Country X

Relevant legislative provisions

Income Tax Assessment Act 1936 -subsection 6(1)(a)

Income Tax Assessment Act 1936 -paragraph 6(1)(a)(i)

Income Tax Assessment Act 1936 -paragraph 6(1)(a)(ii)

Income Tax Assessment Act 1936 -paragraph 6(1)(a)(iii)

Income Tax Assessment Act 1997 -subsection 6-5(2)

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

Income Tax Assessment Act 1997 -subsection 6-10(4)

Income Tax Assessment Act 1937 -subsection 6-10(5)

Reasons for decision

An 'Australian resident' is generally assessable on ordinary and statutory income derived from all sources, whether in or out of Australia, during the income year, respectively under sections 6-5(2) and 6-10(4) of the Income Tax Assessment Act 1997 (ITAA 1997). In contrast, a 'non-resident' is generally assessable only on ordinary and statutory income derived from all Australian sources during the income year, respectively under sections 6-5(3) and 6-10(5) of the ITAA 1997.

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

The terms 'resident' and 'resident of Australia' are defined in subsection 6(1) of the ITAA 1936 to mean:

(a) a person, other than a company, who resides in Australia and includes a person-

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is an eligible employee for the purposes of the Superannuation Act 1976 or is the spouse or a child under 16 years of age of such a person;

Effectively, if a person does not reside in Australia, commonly referred to as 'residence according to ordinary concepts' that person may nevertheless be considered a resident of Australia if he or she satisfies any one of three additional statutory tests set out in paragraphs 6(1)(a)(i) to 6(1)(a) (iii) of the ITAA 1936. Simply stated, these tests are: (i) the domicile and permanent place of abode test; (ii) the 183 day test; and (iii) the superannuation fund test.

Of the three statutory tests, based on the facts provided, only the 'domicile and permanent place of abode test' in section 6(1)(a)(i) of the ITAA 1936 is relevant to the ruling application being considered. That test and its application to the Taxpayer's circumstances are considered in detail later in these reasons.

Residency for income tax purposes

The question of a taxpayer's residence is to be decided on a year-by-year basis so as to determine the taxpayer's annual liability to Australian income tax.

In Commissioners of Inland Revenue v. Lysaght [1928] A.C. 234, it was held that a decision on a question of 'residence' was a finding of fact. i.e., it is essentially a question of fact whether a person does or does not comply with the meaning of that expression and that there is no technical or special meaning attached to the expression for the purposes of the Income Tax Act. Following this, the judgment by the High Court of Australia in Commissioner of Taxation v Miller [1946] HCA 23; 73 CLR 93 ('Miller') is considered as decisive in illustrating the way in which the question of "resident" or "not resident" has become a "question of degree and therefore of fact".

In the present circumstances, the Taxpayer's 'residence' in each of the income years will be determined separately with relevance to the Taxpayer's individual circumstances in those years.

The ordinary concepts test

It was held in Miller that the primary test for deciding the residency status of an individual, for Australian income tax purposes, is whether the individual 'resides' in Australia. The term 'reside' is not defined in Australian income tax law and consequently it takes its ordinary meaning. The Macquarie Dictionary 5th Ed. (2009) defines 'reside' as 'to dwell permanently or for a considerable time, have one's abode for a time'.

Whether a person 'resides' in a particular country is a question of fact and degree. Taxation Ruling TR 98/17 Income Tax: residency status of individuals entering Australia (TR 98/17) contains the Commissioner's interpretation of the ordinary meaning of the word 'resides' (within the definition of resident in subsection 6(1) of the ITAA 1936). TR 98/17 takes into account a number of factors relevant to the question of residency in relation to individuals entering Australia including migrants, visitors, students and academics.

Although TR 98/17 applies to persons entering into Australia, the principles set forth in TR 98/17 are relevant to the present case.

At paragraphs 42 to 63, TR 98/17 provides a detailed examination of the factors that may indicate that individuals are residing here, as listed below:

• Length of physical presence - supports continuity, routine or habit of the individual's behaviour

• Family ties - presence of family suggests establishment of a home in Australia

• Maintenance of assets - such as occupation of a dwelling in Australia, other assets in Australia, such as motor vehicles and bank accounts, add further weight to the individual having established behaviour consistent with residing here.

• Social and living arrangements - indicate the way individuals interact with their surroundings during their stay in Australia.

Current circumstances

The Taxpayer departed Australia to relocate to Country X in the zzzz income year.

The Taxpayer's physical presence in Country X; establishment of an abode in or at a particular place in Country X, an intention to remain in Country X for a considerable time; the establishment of associations in Country X, the Taxpayer's absence from Australia during the preceding few years prior to the period under consideration (notwithstanding a few short visits to Australia in each year of the Taxpayer's absence); the divestment of substantial assets in Australia; intention of selling the Taxpayer's main abode in Australia in the foreseeable future; and the termination of memberships and associations in Australia, means that, the Taxpayer is not a resident of Australia under the 'residence according to ordinary concepts test' in section 6(1)(a) of the ITAA 1936.

As the Taxpayer continues to have a 'domicile' in Australia during this period, it needs to be determined if the Taxpayer falls within the extended definition of resident of Australia under the 'domicile and permanent place of abode test' contained in subparagraph 6(1)(a)(i) of the ITAA 1936.

The domicile and permanent place of abode test

This test broadly provides that a person that sets up a permanent place of abode outside Australia will not be considered to be an Australian resident even if such a person retains his or her Australian domicile.

The leading Australian case on the question of a 'permanent place of abode' outside Australia, is Federal Commissioner of Taxation v Applegate 77 ATC 405; 78 ATC 4054; 79 ATC 4307 ('Applegate').

In Applegate, the taxpayer left Sydney with his wife to be in Vila in New Hebrides for an indefinite period of time for the purpose of commencing a business on behalf of his employer.

On leaving Sydney he gave up the tenancy of the flat in which he and his wife were living. He left no assets in Australia apart from a life policy and membership of a hospital fund which he kept up whilst in the New Hebrides. The taxpayer obtained the lease of a dwelling house in Vila initially for twelve months with a right of renewal for a further like period. He acquired a residency permit in New Hebrides for the period of twelve months which he subsequently renewed for a second term of two years.

The Full Court of the Federal Court concluded in the first place that the 'domicile and permanent place of abode test' is not concerned with whether a person has abandoned his or her Australian domicile or has acquired a new domicile or not; what is of importance is whether the taxpayer has abandoned any residence or place of abode he or she may have had in Australia.

The technical meaning of the term 'permanent place of abode', in the context it appears, was interpreted in Applegate as follows:

• The term 'permanent place of abode' refers to the building or place where a person sleeps or to the building or place where he or she is usually found, for instance, 'a place of business';

• The word 'permanent' in that term must be construed as having a meaning that can be contrasted with a temporary or transitory place of abode rather than everlasting' or forever'; and

• -The word 'permanent' was used to qualify the expression 'place of abode'. Therefore, it does not necessarily direct attention to a taxpayer's intention as to the duration of the taxpayer's residence outside Australia, although this may be one of many relevant factors to be considered.

Further, in regard to the establishment of a permanent place of abode outside Australia, the Federal Court in Applegate held that:

• This is consistent with the establishing of a home in a particular place that the taxpayer is aware that the duration of his enjoyment of the home, although indefinite in length, will be only for a limited period;

• Regard must be paid to the nature and quality of the use which a taxpayer makes of a particular place of abode in determining whether it qualifies as a permanent place of abode;

• Material factors for consideration will be the continuity or otherwise of the taxpayer's presence, the duration of such presence and the durability of the taxpayer's association with the particular place (outside Australia);

• The knowledge that a taxpayer would return to Australia eventually does not deny him or her, a capacity to make his or her home outside Australia, however, if the taxpayer's stay is temporary and he or she intends to move on or return to Australia at some definite point of time this denies the place of abode an essential characteristic of a home, namely durability; and

• Each year of income must be looked at separately. If in the relevant year the taxpayer does not reside in Australia, but has formed the intention to, and in fact has, resided outside Australia, then truly it can be said that his permanent place of abode is outside Australia during that year of income.

Other cases have also considered the term 'permanent place of abode' subsequent to the decision in Applegate. While each case is simply a decision on its own facts, the practical meaning of the term 'permanent place of abode' as construed in Applegate has been endorsed and relied upon in subsequent case decisions, notably Federal Commissioner of Taxation v Jenkins 59 FLR 467 (1982) 12 ATR 745 ('Jenkins') and the more recent decisions in Shand v Federal Commissioner of Taxation 2003 ATC 2080 ('Shand') Federal Commissioner of Taxation v Mynott 2011 ATC 10-195; AATA 539 ('Mynott'), and Federal Commissioner of Taxation v lyengar 2011 ATC 10 -222; AATA 856 ('lyengar').

The decisions in Shand and lyengar establish that a taxpayer's long absence from Australia does not automatically lead to his or her divestment of Australian residency unless it can be established that the taxpayer has set up a 'permanent place of abode', as defined in Applegate, outside Australia.

In each of the above cases the court found that the overseas accommodations of the taxpayers lacked the characteristics of a 'permanent place of abode' in relation to the nature and quality of the use of the accommodations by the taxpayers. Further, the taxpayers not only maintained a place of residence in Australia but also retained a continuity of association with Australia, together with an intention to return to Australia.

The court's findings were made on the basis that the overseas accommodations of the taxpayers were furnished (also serviced in lyengar) apartments provided free of charge to the taxpayers. There was no evidence to show that the taxpayers had any enduring relationship with or ties to the overseas country as the taxpayers did not lease or purchase real estate on their own account or purchase personal property items such as a car.

That the taxpayers retained a continuity of association with Australia was evidenced by their visits to their family home in Australia whenever their business or work commitments allowed. The wives and children of the taxpayers continued to live in Australia and did not join the taxpayers at their overseas abode, except for three short visits by the family in the case of Iyengar. Additionally, the taxpayers retained substantial personal property items in Australia and, in Iyengar, the taxpayer's cars.

This led to the conclusion that the overseas accommodations of the taxpayers were no more than temporary or transitory places of abode and distinguishable from a 'permanent place of abode' as exemplified in Applegate.

In contrast, the AAT found the taxpayer in Mynott to be a non-resident and although he spent a third of the period under consideration in Australia, it was held that his factual circumstances and what took place in Australia when he left Australia were not significantly different to the circumstances presented in Applegate.

He had sold his substantial assets and his principal residence in Australia. However, he kept a room at his parent's house in Australia, retained small investments, disclosed his parent's residential address in relation to his taxation returns and investments and kept his name on the Australian electoral roll.

Of significance is the fact that he had established a home in the Philippines where his partner and children lived. He worked overseas as he was unable to secure work in the Philippines. His overseas earnings, although deposited in an Australian bank account, were transferred to the Philippines for the living and schooling expenses of his family. He visited his parents in Australia on the completion of a contract, however, he would always return to the Philippines to be with his family.

Ultimately, the nature and quality of the use that the taxpayer made of his apartment in the Philippines was seen by the court as the establishment of a 'permanent place of abode' in the Philippines.

In AAT Case 4834 (88) 89 ATC 196; (88) 20 ATR 3121, the Tribunal applied the criteria and discussion of the Full Court of the Federal Court in Applegate to determine the residency of the taxpayers concerned. The taxpayers, a husband and wife of Greek origin, relocated to Greece with their children to care for their elderly parents after a period of living in Australia for 15 years. At the time of their relocation to Greece they had leased a supermarket building and five flats in Australia from which they derived rental income. Further, they retained their family home in Australia with all its furniture and fittings.

Following their relocation to Greece, the taxpayers made visits to Australia on two occasions, one of them for a period of three months, to effect repairs to their properties. There were also some brief trips by the taxpayers to other parts of Europe for holiday purposes. The aliens resident permit on which they entered Greece did not entitle them to work in Greece. The taxpayers supported their family including the education of their children using the rental income received in respect of their Australian properties. The taxpayers returned to Australia after some nine years of initially leaving Australia to live in their family home.

The Commissioner determined the taxpayers to be non-residents from the time of their departure to Greece. The taxpayers objected to the decision on the basis that their domicile is in Australia and that their 'permanent place of abode' was not outside Australia during the relevant years.

The AAT held that although the taxpayers in question retained assets in Australia including supermarket premises, their house and furniture, and used the rental proceeds for the purposes of paying various accounts, in every other sense the taxpayers were living outside Australia during those years and the period was long-term and indefinite. Furthermore, the taxpayers' deliberate intention was to remain outside Australia for an indefinite period and this amounts to the establishment of a permanent place of abode in Australia.

Taxation Ruling No IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650) deals with the question of residency in respect of Australian residents who leave Australia temporarily to live overseas, e.g. on temporary overseas work assignments or overseas study. The ruling is relevant in the present circumstances to the extent that it contains the guidelines used by the Australian Taxation Office (ATO) in reaching a conclusion that a taxpayer has abandoned his or her residence in Australia and established a place of abode outside Australia.

IT 2650, at paragraph 23, lists the following factors which the Commissioner considers as relevant in determining an individual's 'permanent place of abode' overseas:

(a) The intended and actual length of the taxpayer's stay in the overseas country;

(b) Whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

(c) Whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

(d) Whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

(e) The duration and continuity of the taxpayer's presence in the overseas country; and

(f) The durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

In regard to the weight to be given to each of the abovementioned factors, IT 2650 provides at paragraph 24 that this will vary with the individual circumstances of a taxpayer and that while no single factor is decisive, the decision in Applegate seems to indicate that greater weight should be given to factors (c), (e) and (f).

The Taxpayer's circumstances (as per the facts provided in the Taxpayer's ruling application) in regard to their relevance to each of the factors listed previously, can be summarised as follows:

(a) Intended and actual length of the Taxpayer's stay in the overseas country

The Taxpayer intends to remain in Country X for a period of three to five years. Currently, the actual length of the Taxpayer's stay is a few years prior to the private ruling application.

(b) Whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time.

Following the further three to five years in Country X, the Taxpayer may then decide to remain in Country X or return to Australia. The Taxpayer does not intend to return to Australia at a definite point in time.

(c) Whether the Taxpayer has established a home outside Australia.

The Taxpayer has been residing in Country X since relocating in zzzz income year in a property which was initially leased by the Taxpayer's spouse but has since been purchased by the Taxpayer.

The Taxpayer regards this property as the Taxpayer's home and main residence.

(d) Whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence.

The Taxpayer retains a main residence in Australia. The Taxpayer's spouse and child have relocated to Country X. The Taxpayer intends to sell this property as soon as current renovations are complete and the property market conditions are favourable. The Taxpayer has no intention to live in this property in the foreseeable future. The Taxpayer has not returned to the property during the period under consideration.

Accordingly, the Taxpayer does have a place of abode in Australia until this property is sold.

Based on the information provided by the Taxpayer, the Taxpayer does have a dwelling in Australia that is available to the Taxpayer to occupy if the Taxpayer decides to return to Australia in the future. The Taxpayer has previously made several visits to Australia since the Taxpayer's relocation to Country X in the zzzz income year, however the Taxpayer has not stayed in this property and therefore has not returned to the dwelling during the income years after relocation to Country X.

(e) The duration and continuity of the Taxpayer's presence in Country X.

As the Taxpayer has commenced living in Country X for a few years prior to the private ruling application, at this stage, the duration of the Taxpayer's stay in Country X is largely based on the Taxpayer's intention, which is to live there for a period of three to five years.

The intention is however supported by the Taxpayer's actions which include:

• purchased a property;

• registered for private health insurance and used the services of a local doctor and dentist;

• engaged the services of a Country X accountant and lawyer and opened a bank account;

• enrolled their child in a local school;

• obtained a Country X drivers licence and arranged entry into the Country X taxation system;

• joined a private gym;

• registered as a voter with the Country X electoral office.

(f) The durability of association that the Taxpayer has with a particular place in Australia.

The Taxpayer retains a main residence in Australia.

The Taxpayer's mother, siblings, mother-in-law and sister-in-law are currently living in Australia.

The Taxpayer has cut off many ties with Australia including cancelled a Medicare card; cancelled subscriptions; resigned as secretary and public officer of a company; disengaged several professional associations and was removed from the Australian Electoral Role.

Conclusion

The circumstances of the Taxpayer in the present case are clearly distinguishable from those in Shand and Iyengar. The circumstances in question can also, in a number of respects, be aligned with the situation in Applegate, Jenkins, Mynott, and in particular, AAT Case 4834.

Consequently, in respect of the period after the Taxpayer's departure from Australia in the zzzz income year, the Taxpayer has established a 'permanent place of abode' in Country X for the reasons provided below:

The Taxpayer has purchased a property. For the time being, the Taxpayer regards this property as the Taxpayer's main residence.

The Taxpayer has formed an enduring relationship and developed ties with Country X through registering as a voter with the Country X electoral office and engaging the services of local professionals such as a doctor, dentist, accountant and lawyer. The Taxpayer has taken steps to participate in social activities in the Taxpayer's current location through joining a gym and supporting a local charity. The Taxpayer has opened a local bank account. The Taxpayer's spouse and child are living with the Taxpayer in Country X and their child is enrolled in a local school.

That the Taxpayer intends to live in Country X for a definite period, i.e., a period of three to five years, does not make the Taxpayer's stay in Country X temporary for the purposes of the 'permanent place of abode test'. This is supported by the view held by the court in Jenkins that a substantial period of stay in an overseas country cannot be regarded as 'temporary' purely because the limits of the stay are ascertainable.

The connection with real estate and other assets in Australia by the Taxpayer cannot on its own lead to a conclusion that the Taxpayer has not established a permanent place of abode in Country X. In this regard the Taxpayer's circumstances are very similar to that of the taxpayers in AAT Case 4834 who were considered to have established a permanent place of abode in Greece. This was despite the fact that the taxpayers retained substantial assets in Australia including supermarket premises, five investment properties, their house and furniture, and used the rental proceeds for the purposes of paying their overseas and Australian expenses.

Accordingly, during the period after leaving Australia in the zzzz income year, the Taxpayer is considered not to be a resident of Australia pursuant to paragraph 6(1)(a)(i) of the ITAA 1936. This period includes the income years ending 30 June xxxx to 30 June yyyy