Edited version of your written advice

Authorisation Number: 1012914881531

Date of advice: 24 November 2015

Ruling

Subject: Residency and non-resident withholding tax

Questions and answers:

1. Were you a resident of Australia for the period Date A to Date B?

No.

2. Does your assessable income in Australia between Date A and Date B include:

a. bank interest from Australian financial institutions, and

b. dividends from shares paid to you as a shareholder of a company, to the extent to which those dividends were paid out of profits derived by the company from sources in Australia?

No.

3. Does non-resident withholding tax apply to your interest and unfranked dividend income for the period Date A to Date B?

Yes.

This ruling applies for the following period:

1 July 200X to 30 June 20XX.

The scheme commenced on:

1 July 200X.

Relevant facts and circumstances:

You were born in Australia and have Australian citizenship.

You have no spouse, partner, or children.

You left Australia on Date A and travelled to Country A where you lived and worked until you returned to Australia on Date B.

You became a citizen of Country A.

During the period you spent living and working in Country A:

• You returned to Australia on four occasions for short periods to visit family and friends.

• You paid tax in Country A.

• You lived in rented properties and had leases in your name for those properties.

Your only assets in Country A were a bank account and personal possessions.

You do not own any residential property in Australia and were living in rented accommodation prior to leaving Australia on Date A.

Your only assets in Australia are bank accounts, some shares, furniture and other household effects.

You put your household effects in storage before leaving Australia on Date A.

You were removed from the Australian Electoral Roll.

You have never been an employee of the Commonwealth government of Australia.

You were a resident of Australia for taxation purposes before you left Australia on Date A.

Your only income from Australia sources during the period you were in Country A was bank interest and dividends from shares.

Relevant legislative provisions:

Income Tax Assessment Act 1997 - Section 6-5

Income Tax Assessment Act 1997 - Section 6-10

Income Tax Assessment Act 1997 - Section 10-5

Income Tax Assessment Act 1997 - Section 11-55

Income Tax Assessment Act 1997 - Subsection 6-15(3)

Income Tax Assessment Act 1997 - Section 6-23

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

Income Tax Assessment Act 1936 Section 6(1)

Income tax Assessment Act 1936 - Sub paragraph 44(1)(b)(i)

Income tax Assessment Act 1936 - Subsection 128B(1)

Income tax Assessment Act 1936 - Subsection 128B(2)

Income tax Assessment Act 1936 - Paragraph 128B(3)(ga)

Income tax Assessment Act 1936 - Subsection 128B(4)

Income tax Assessment Act 1936 - Subsection 128B(5)

Income tax Assessment Act 1936 - Section 128D

Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 - Section 7

Reasons for decision

Foreign residents and Australian sourced interest and dividend income

The assessable income of a foreign resident generally includes all their ordinary and statutory income from Australian sources.

A foreign resident is someone who is not an Australian resident for taxation purposes.

Amounts considered to be income from Australian sources include:

• bank interest from Australian financial institutions, and

• dividends (franked and unfranked) from shares paid to a shareholder of a company, to the extent to which those dividends are paid out of profits derived by the company from sources in Australia.

Bank interest is ordinary income and is generally assessable under the provisions of section 6-5 of the Income tax Assessment Act 1997 (ITAA 1997).

Dividends are statutory income and are generally assessable under the provisions of section 44 of the Income Tax Assessment Act 1936 (ITAA 1936).

In some circumstances, the tax law can apply to exclude from an individual's assessable income an amount that would otherwise be assessable.

Subsection 6-15(3) of the ITAA 1997 provides that if an amount is non-assessable non-exempt income, it is not assessable income. Section 6-23 of the ITAA 1997 provides that an amount is non-assessable non-exempt income if it is made so by a provision of the tax law or another Commonwealth law.

Unfranked dividend and interest income from Australian sources that is earned by a foreign resident is subject to withholding tax under the provisions of sections 128B(1) and 128B(2) of the ITAA 1936 respectively. Franked dividends are excluded from the withholding tax provisions by the operation of paragraph 128B(3)(ga) of the ITAA 1936.

Section 128D of the ITAA 1936 provides that:

• interest and dividend income upon which withholding tax is payable is not assessable income and is not exempt income of a person, and

• franked dividends upon which withholding tax would be payable but for the operation of paragraph 128B(3)(ga) of the ITAA 1936 are also not assessable income and not exempt income of a person.

In simple terms, the law stated above means that if you are a foreign resident, your assessable income in Australia will not include your interest and dividend income from Australian sources. However, your interest and unfranked dividend income from Australian sources is subject to withholding tax for any period you are a foreign resident.

Non-resident withholding rates and the Australia/Country A tax treaty

Section 7 of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (the Withholding Act) sets the rates of non-resident withholding tax on payments of Australian sourced dividend and interest income to foreign residents as follows:

• 30% for dividend income, and

• 10% for interest income.

Where a foreign resident resides in a country that has a tax treaty with Australia, the non-resident withholding rates set by the Withholding Act may be adjusted under the terms of the relevant treaty.

Australia has a tax treaty with Country A (the Agreement).

The Agreement provides that a specific non-resident withholding rate is to be applied to Australian sourced dividend and interest income.

In simple terms, the law stated above means that if you are a foreign resident living in Country A, your Australian sourced unfranked dividend and interest income is subject to non-resident withholding tax at the rates specified in the Agreement.

Residency for taxation purposes

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 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 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.

Based on the facts you have provided, we can conclude you were not an Australian resident for taxation purposes between Date A and Date B.

Conclusion

Between Date A and Date B you were a foreign resident living in Country A. During this time you earned interest and dividend income from Australian sources. That income is excluded from your assessable income in Australia but is subject to the applicable non-resident withholding tax rates for the period you were a foreign resident.