Edited version of your written advice

Authorisation Number: 1012836165829

Date of advice: 9 July 2015

Ruling

Subject: Residency

Question and answer

Were you a resident of Australia for tax purposes while you were working in country X?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2014

Year ended 30 June 2015

The scheme commences on:

1 July 2013

Relevant facts and circumstances

You are an Australian citizen.

You took up a contract of employment in country X.

You were employed as a permanent employee for an indefinite period subject to an initial probationary period. The contract could be terminated at any time by either party.

You were granted a residency visa for country X which was valid for two years and obtained an identity card for country X.

You obtained a drivers licence and took out health insurance in country X.

You opened a bank account in country X into which your wages were paid and also opened a second bank account.

You initiated the process of obtaining a sponsorship visa for your spouse in anticipation of your spouse joining you in country X.

Your intention at the time was to work for your employer in country X or elsewhere overseas for an indefinite period of time.

You anticipated that you would eventually return to Australia: however, you did not know when that would be.

After six weeks in country X, you relocated from one area to another to co-locate with the project and client of your employer to which you were seconded.

Given the uncertainty around where you would be based during the probationary period, you elected not to take up a rental house/unit and elected to stay at a rented room/suite at a hotel on long term stay rates for the eventual 12 months of your stay in that area.

Rental of accommodation in country X typically requires the prepayment of a year's rent which represented a risk to you given it was likely that you may not have been based in the one place for the full year.

Prior to leaving for country X, you lived in the dwelling you jointly owned with your spouse.

Your spouse was to join you in country X after you had successfully completed the probationary period and achieved permanent employee status and with it greater employment security.

Your spouse had a business in Australia and did not want to take a risk of discontinuing the business and relocating until there was greater security around your employment in country X.

As a result of personal issues and the subsequent extension of your probationary period, your spouse did not join you in country X and remained living in your Australian dwelling.

You were advised that the client of your employer intended to fill the position into which you were seconded with a full-time employee and were in the process of recruiting a suitable person which would have made your position redundant.

You held discussions with your employer in regard to your possible relocation to a project in another country.

You eventually resigned and ended up spending 12 to 18 months in country X.

Were it not for issues relating to your spouse, you would have continued working with your employer overseas.

During the period of your employment contract, you returned to Australia on several occasions for brief periods of time.

During the period of your employment contract, you took several periods of leave in countries outside Australia.

Prior to taking up the employment contract in country X, you ran your own business in Australia through a company. You placed the company into hiatus and cancelled your professional indemnity insurance.

You retained the company structure for future use as an investment vehicle for property or share investments.

Your assets in Australia included your dwelling, an investment unit, shares, a vehicle, a boat, household effects and various bank accounts. You had a mortgage over each of your properties.

The rental income on the investment property covered expenses and mortgage repayments.

Repayments on the home loan over your residence were covered by funds held in an offset account.

During the period you were overseas, your spouse was financially self-sufficient as she was running her own business.

While you were overseas, you transferred funds that were surplus to your needs back to Australia to place in your Australian bank account(s).

You delayed notifying the Australian Electoral Commission to remove your name from the electoral roll pending completion of your probationary employment period which was further extended.

You delayed notifying the financial institutions you had dealings with that you were a foreign resident pending completion of your probationary employment period which was further extended.

When completing the Australian immigration outgoing passenger card you stated that the reason for you going overseas was for employment.

Neither you nor your spouse has ever been employed by the Australian commonwealth government.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 995-1(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 subsection 6(1)

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, where you are a foreign resident, your assessable income includes only income derived from an Australian source.  

Section 995-1 of the ITAA 1997 defines an Australian resident for tax purposes as 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', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. The tests are:

• the resides test,

• the domicile (and permanent place of abode) test,

• the 183 day test, and

• the superannuation test.

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual for taxation purposes. If residency is established under the resides test, the remaining three tests do not need to be considered. However, if residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test

The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes its ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936.

The question of whether an individual 'resides' in a particular country is a question of fact and degree and not of law. The totality of the taxpayer's factual circumstances needs to be taken into account in arriving at a decision.

In Dempsey and Commissioner of Taxation [2014] AATA 335 (Dempsey), the Administrative Appeals Tribunal of Australia (AATA) restated that the cases of Levene v Inland Revenue Commissioners [1928] AC 217 (Levene), Lysaght v Inland Revenue Commissioners (1928) 13 TC 511 (Lysaght) and Federal Commissioner of Taxation v Miller (1946) 73 CLR 93 (Miller) were authoritative on the meaning of the word 'resides'.

In Levene (at 222), it was stated that:

… the word 'reside' is a familiar English word and is defined in the Oxford English Dictionary as meaning 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live in or at a particular place.' No doubt this definition must for present purposes be taken subject to any modification which may result from the terms of the Income Tax Act and Schedules; but, subject to that observation, it may be accepted as an accurate indication of the meaning of the word 'reside.' In most cases there is no difficulty in determining where a man has his settled or usual abode, and if that is ascertained he is not the less resident there because from time to time he leaves it for the purpose of business or pleasure.

The same approach was adopted in Lysaght. In this case, the Court also noted that mere fact that visits to a country are of short duration does not of itself exclude residence in that country.

In Miller (at 100-101), it was emphasised that the word 'resides' was 'not a term of art denoting a field with precisely defined boundaries' and 'is an ordinary English word extending over a field the boundaries of which constitute a broad limbo with blurred edges'. The court (at 101 and 103) was of the view that the meaning of the word 'resides' being so understood, the question as to where someone resided entailed questions of degree and was one of fact.

In Koitaki Para Rubber Estates Limited v Commissioner of Taxation [1941] HCA 13; 64 CLR 241, it was stated (at 249):

The place of residence of an individual is determined, not by the situation of some business or property which he is carrying on or owns, but by reference to where he eats and sleeps and has his settled or usual abode. If he maintains a home or homes he resides in the locality or localities where it or they are situate, but he may also reside where he habitually lives even if this is in hotels or on a yacht or some other place of abode:

Further, in Joachim v Federal Commissioner of Taxation 2002 ATC 2088, it was stated (at 2090):

Physical presence and intention coincide for most of the time but few people are always home. Once a person has established a home in a particular place, even involuntary, a person does not necessarily cease to be resident here because he or she is physically absent. 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.

In Dempsey (at 98), the AATA discussed the nature of fact and degree in determining the issue of residency:

Further, in considering the outcome in some of the cases, it is necessary to bear in mind the nature of the jurisdiction which was exercised. Though the meaning of "resides" was considered and explained in both Levene and Lysaght, the outcome in those cases turned on whether, that meaning so understood, there was evidence to support the finding of fact as to residence to which the Inland Revenue Commissioners had come. Neither case is authority for the proposition that the particular conclusion was the only one which might have been reached on such facts, only that the question being one of degree and there being evidence to support the particular conclusion, it ought not to be disturbed. Miller is an Australian illustration of this same point. Dixon J frankly confessed to a doubt as to whether he would have reached the same conclusion on the facts as had the Board of Review, but recognised that the question was one of degree and that the Board's view of the facts was not, on the ordinary meaning of the word "resides", a legal impossibility. Understanding this is one reason why not all outcomes on particular facts on the subject of residency are readily reconcilable.

In your case, there are various factors that indicate that you may have been residing outside Australia during the relevant period:

• You took up an employment contract as a permanent employee for an indefinite period of time;

• You intended to work with your employer in country X or elsewhere overseas for an indefinite period of time;

• Your spouse intended to join you in country X;

• You placed your Australian business into hiatus when you took up your new position;

• You established your own accommodation in country X;

• You opened bank accounts and obtained a drivers licence in country X;

• Some of your leave periods were spent in countries other than Australia;

• The return visits you made to Australia were only of brief duration.

However, there are also various factors that indicate that you may have still been residing in Australia:

• Your spouse did not join you in country X;

• Your spouse remained living in your furnished Australian dwelling;

• You had a residence available to you in Australia;

• You retained your Australian bank accounts;

• You transferred surplus amounts from your employment income to your Australian bank account(s);

• You retained your Australian assets;

• You did not accumulate any assets in country X;

• You retained your Australian company directorship;

• You made three return visits to Australia during the period of your foreign employment.

In deciding questions of residency, the Commissioner considers that it is difficult for a taxpayer to demonstrate that they have ceased to be a resident of Australia where a place of residence remains available to them in Australia and/or where their spouse remains living in Australia.

In these situations, it may be considered that the taxpayer meets the resides test as they have retained a continuity of association with Australia. Further, they may also meet the domicile test as the Commissioner may not be satisfied that they have a permanent place of abode outside Australia. Examples of decisions of this type can be found in Iyengar and Federal Commissioner of Taxation [2011] AATA 856 and Sneddon and Commissioner of Taxation [2012] AATA 516.

However, examples of different outcomes can be found in two recent cases, The Engineering Manager and Commissioner of Taxation [2014] AATA 969 (Engineering Manager) and Dempsey. In both these cases, the taxpayers left Australia to work overseas and were found to be non-residents, as in the opinion of the AATA, they did not meet the resides or domicile tests of residency.

In Dempsey, the taxpayer was found to be a non-resident even though he maintained a place of residence containing his household effects and vehicles in Australia. He also stayed at the house on his occasional return visits to Australia. In this case, the taxpayer was not in a relationship and the AATA noted (at 109) that he was a 'free agent' not only in terms of the transferability of his skills, but also in terms of his 'personal circumstances'. That is, he was a single man who left no family at the house.

In the Engineering Manager, the taxpayer was found to be a non-resident even though he maintained a place of residence in Australia in which his spouse and children lived. The AATA stated (at 55) that the taxpayer's connection with his children was not determinative of whether he resided in Australia. However, the AATA also stated (at 48) that his marital relationship was 'fractured' and (at 56) that the inharmonious nature of the relationship was considered to be a 'very significant factor' (in finding that he was a non-resident).

In your case, we consider it significant that your spouse did not join you in country X. Although the reasons for this were outside anyone's control, the fact is that your spouse remained living in your dwelling which remained available for your use during the time you were overseas.

Accordingly, your circumstances are ultimately different to Dempsey as the taxpayer did not have a spouse living in his dwelling and also different from the Engineering Manager as there is nothing to indicate that you had an inharmonious relationship with your spouse during the relevant period.

Consequently, we consider that, on balance, your intention to work overseas indefinitely is outweighed by the continuity of association you retained with Australia during the period you worked in country X.

Therefore, you continued to reside in Australia according to the ordinary meaning of the word and were a resident under the resides test of residency.

Whilst it is not necessary to meet more than one test to determine residency for tax purposes (as we have already established that you are a resident under the 'resides' test), we will also include a discussion of the 'domicile and permanent place of abode' test as an alternative argument.

The domicile test

Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia.

Domicile

A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. A person may acquire a domicile of choice in another country if they have the intention of making their home indefinitely in that country.

The intention needs to be demonstrated in a legal sense, for example, by way of obtaining a migration visa, becoming a permanent resident or becoming a citizen of the country concerned.

In your case, you were born overseas, changed your domicile to Australia and did not take any steps to change your domicile to any other country during the relevant period. Therefore, your domicile was still Australia during the period you were working in country X.

Permanent place of abode

It is clear from the case law that 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.

A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest your life.  An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere.

The leading authority on the meaning of permanent place of abode is a decision of the Federal Court of Australia in Federal Commissioner of Taxation v Applegate (1979) FCA 66 (Applegate).

In Applegate (at 128), the meaning of 'permanent place of abode' was discussed as follows:

To my mind the proper construction to place upon the phrase "permanent place of abode" is that it is the taxpayer's fixed and habitual place of abode. It is his home, but not his permanent home. It connotes a more enduring relationship with the particular place of abode that that of a person who is ordinarily resident there or who has there his usual place of abode. Material factors for consideration will be the continuity or otherwise of the taxpayer's presence, the duration of his presence and the durability of his association with the particular place.

It follows then that in my opinion the intention of the taxpayer as far as returning to Australia is concerned is just one of the factors for consideration. But it is a factor which I consider has less significance than the taxpayer's intention in relation to his place of abode outside Australia. Intention to return to Australia is a crucial feature in considering whether the taxpayer has retained an Australian domicile. Intention to make his home for the time being in his place of abode outside Australia is an important element in characterizing that place of abode as his "permanent" place of abode.

Further, in Federal Commissioner of Taxation v Jenkins (1982) 12 ATR 745, it was considered that the taxpayer satisfied the test for a permanent place of abode outside of Australia in circumstances where the limit of his stay was fixed and ascertainable. This fact did not preclude his stay from being considered 'permanent'.

In light of the above, Taxation Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650) provides a list of some of the factors that are considered relevant in reaching a satisfaction as to a taxpayer's permanent place of abode:

a) the intended and actual length of the individual's stay in the overseas country;

b) any intention either to return to Australia at some definite point in time or to travel to another country;

c) the establishment a home outside Australia;

d) the abandonment of any residence or place of abode the individual may have had in Australia;

e) the duration and continuity of the individual's presence in the overseas country; and

f) the durability of association that the individual has with a particular place in Australia.

In your case, although you intended to work overseas indefinitely and established your own accommodation in country X, you did not abandon your residence in Australia, as it was still available to you, and you retained a durable association with Australia, in particular through your spouse remaining in Australia.

Consequently, the Commissioner is not satisfied that you had a permanent place of abode outside Australia and you were, therefore, a resident under the domicile test of residency during the period you worked in country X.

Your residency status

As you meet the resides and domicile tests of residency, you were a resident of Australia for tax purposes during the period you worked in country X.

As you were a resident of Australia, your assessable income includes income gained from all sources, whether in or out of Australia.