Edited version of your written advice

Authorisation Number: 1012864433372

Date of advice: 24 August 2015

Ruling

Subject: Assessability of foreign income

1. Is all your income from professional software development and consultancy services assessable in Australia?

Yes

2. Is all your income from web hosting and mobile applications assessable in Australia?

Yes

This ruling applies for the following period:

Year ended 30 June 2015

Year ending 30 June 2016

The scheme commenced on:

I July 2014

Relevant facts and circumstances

You are an Australian citizen and Australian resident for tax purposes.

You are a Country A resident for Country A tax purposes.

Your spouse is a Country A citizen and an Australian permanent resident.

You and your spouse spend time in both Country A and Australia.

You and your spouse have a home available to you in Country A and in Australia.

Your assets in Australia include a savings bank account and a car. Your spouse has a savings bank account and some term deposits in Australia. Your spouse has a couple of term deposit type accounts in Country A.

You keep most of your personal effects in Australia. However, the vital day-to-day personal effects are either in Country A or you have purchased replacements.

You will be in Country A for an aggregate of 183 days or more during the period covered by this ruling.

Income

You receive fees from an ongoing contract for professional software development and consultancy services which you perform yourself.

You client is located in Country B. Your arrangement is contractual and the fees are paid into your Australian bank account.

You receive income from a web hosting business which has several regular customers from all over the world.

The servers are located in Country B.

You also receive business income from mobile applications.

You operate your internet business without an office. You essentially 'work from home'. All you require is your laptop and some accessories which you have in both Australia and in Country A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

International Tax Agreements Act 1953

International Tax Agreements Act 1953 Section 4

Reasons for decision

1. Residency status

You are a resident of Australia for Australian tax purposes and a resident of Country A for Country A tax purposes and hence you are a dual resident under the International Tax Agreements Act 1953, which includes the Country A Agreement.

Article V of the Country A Agreement is a tie-breaker provision which applies to dual resident individuals, ie individuals who would otherwise be treated as residents of both Australia and Country A This Article provides as follows:

An individual dual resident is deemed to be resident solely in:

(a) the country in which he or she has a permanent home;

(b) if a permanent home is available in both countries, or in neither of them, the country which is the individual's habitual abode;

(c) if the individual has an habitual abode in both countries or in neither of them, the country with which the individual's economic and personal relations are closer. In making this determination, an individual's citizenship must be taken into account.

Permanent home

The term 'permanent home available to him' in Article V is not defined in the Country A Agreement.

Article W of the Country A Agreement provides for present purposes that, in Australia applying the Agreement, any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under Australian law.

To assist in the interpretation of the Malaysian Agreement, reference is made to Taxation Ruling TR 2001/13 - Income tax: Interpreting Australia's Double Tax Agreements.

Paragraph 104 of TR 2001/13 states that the OECD Model Tax Convention and Commentary (OECD Commentary) will often need to be considered in interpreting tax treaties.

The OECD Commentary provides that in relation to a 'permanent home':

(a) for a home to be permanent, an individual must have arranged and retained it for his or her 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. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc)

(b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

In your case you have a home readily available to you and your spouse in both Australia and Country A. As you have residences in both countries which are available at all times continuously for your permanent use, you have a permanent home in Australia and in Country A.

Habitual abode

In relation to a habitual abode, the OECD Commentary states that all stays in each country, regardless of the purpose for the stays, must be considered in order to assign a preference to a particular country. Further, the comparison must be made over a sufficient length of time for it to be possible to determine whether the presence in each country is habitual and to also determine the intervals at which the stays take place.

The notion of a habitual abode is not simply a test of where a person stays more frequently but also looks to whether living in a particular country is normal or customary having regard to the taxpayer's circumstances. As it is usual or customary for you to spend time in both countries, you have a habitual abode in both countries.

Economic and personal ties

In relation to a taxpayer's personal and economic relations, the OECD Commentary states that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business.

In your case you have personal ties in both Country A and Australia. You are an Australian citizen and Australian resident for tax purposes. You are also a Country A resident for Country A tax purposes. In addition, your spouse is a Country A citizen and an Australian permanent resident. You possess assets in Australia including a savings bank account and a car. Your spouse has a savings bank account and term deposits in Australia. As well as a couple of term deposit type accounts in Country A.

You have economic ties with both Australia and Country A. Due to the nature of your internet business you do not need to be located in a particular country to earn your income. You operate your internet business without an office. You essentially 'work from home'. All you require is your laptop and some accessories which you have in both Australia and Country A. Thus your economic ties are in both countries.

The Country A Agreement specifies that an individual's citizenship must be taken into account in determining which country an individual's economic and personal ties are closer. As you are an Australian citizen, your economic and personal ties are closer to Australia. This is supported by the fact that you keep most of your personal effects in Australia Accordingly you will be treated as a resident of Australia for the purposes of applying the provisions of the Country A Agreement to income earned by you during the period of dual residency.

2. Assessability of non-Australian sourced income

a) Income from professional software development and consultancy services

You receive fees from an ongoing contract for professional software development and consultancy services which you perform yourself. You client is located in Country B. Your arrangement is contractual (ie. non-employee) and they pay fees to your Australian bank account.

Article X of the Country A Agreement deals with income derived from personal services.

Paragraph (1) of Article X of the Country A Agreement provides that remuneration derived by an individual who is a resident of Australia in respect of personal (including professional) services may be taxed only in Australia unless the services are performed in Country A. If the services are performed in Country A, the remuneration may be taxed in Country A.

However, paragraph (2) of Article X provides that remuneration derived from personal services performed in Country A will be taxable only in Australia if:

(a)  the taxpayer is present in Country A for a period or periods not exceeding in the aggregate 183 days in the basis year of income of Country A

(b)  the remuneration is paid by or on behalf of a person who is not a Country A resident; and

(c)  the remuneration is not deductible in determining the profits of a permanent establishment which that person has in Country A.

In your case, for the period in question you will be in Country A for an aggregate period of 183 days or more for the period in question. Thus the first condition is not met. However, the other two conditions are met. The remuneration is paid by a person who is not a Country A resident. Also the remuneration is not deductible in determining the profits of a permanent establishment which the person has in Country A.

As all three conditions are not met, your income from personal services is assessable in Australia and may also be taxed in Country A.

b) Income from websites and mobile applications.

You receive income from a web hosting business which has several regular customers from all over the world. The servers are located in Country B. You also receive business income from mobile applications.

The basic principle underlying the taxation of business profits is stated in Article Y of the Country A Agreement. From the Australian perspective it provides that an Australian enterprise's profits are taxable only in Australia unless the enterprise carries on business in Country A through a permanent establishment in Country A.

If an Australian enterprise has a permanent establishment in Country A, Country A can tax the profits of that enterprise, but only to the extent that the profits are attributable to: the permanent establishment.

As you are an Australian resident for tax purposes as well as for DTA purposes and you are the one who operates the business, your business is also an Australian resident. We shall now consider if your business has a permanent establishment in Country A.

Permanent establishment

The term 'permanent establishment' is defined in Article Z of the Country A Agreement as a fixed place of business through which the business of an enterprise is wholly or partly carried on. It includes a place of management, an office, a branch, a factory and a workshop.

The definition of a permanent establishment is explained in the OECD Commentary on Article Z of the OECD Model Tax Convention as containing the following requirements:

• the existence of a 'place of business' such as premises, machinery or equipment;

• a 'fixed' place of business which means that the place of business must be established at a distinct place with some degree of permanence; and

• personnel to conduct the business from that place.

Then term 'place of business' covers any premises, facilities or installations used for carrying on the business of an enterprise, whether owned, rented or otherwise at the disposal of the enterprise.

According to the definition, the place of business has to be' fixed' in that there has to be a link between the place of business and a specific geographical point. Additionally, the place of business must have a certain degree of permanency.

Taxation Ruling TR 2002/5 entitled Permanent establishment - What is 'a place at or through which a person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? is concerned with permanent establishment. The Ruling gives the Commissioner's interpretation of the meaning of the phrase 'a place at or through which a person carries on any business' in the definition of 'permanent establishment' in subsection 6(1) of the ITAA 1936.

The ruling at paragraph 9 confirms that a permanent establishment is a reference to a place used for carrying on a person's business activities. That place must have an element of permanence, both geographic and temporal.

In your case, you operate your internet business without an office. You essentially 'work from home'. All you require is your laptop and some accessories.

You do not have a fixed place of business in Country A which has a degree of permanency. The servers for your web hosting are located in Country B. It cannot be said that your business has a permanent establishment in Country A. Accordingly, under the Country A Agreement the income you derive from your internet business is taxable only in Australia.

Conclusion

You are an Australian resident for tax purposes as well as for DTA purposes. All your income from professional software development and consultancy services and website and mobile applications is assessable in Australia. Your income from consultancy services may also be assessable in Country A under the Country A Agreement.