Edited version of your written advice

Authorisation Number: 1051181803144

Date of advice: 18 January 2017

Ruling

Subject: Residency status, assessable allowance and deductible expense

Question 1

Are you a resident of Australia for income tax purposes?

Answer

Yes.

Question 2

Is the relocation allowance that you received taxable in Australia?

Answer

Yes.

Question 3

Are you entitled to claim a deduction for living expenses while employed in Country T?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2016

The scheme commences on

1 July 2015

Relevant facts and circumstances

You are single with no dependants.

You were born in Country Y and are a citizen of both Country Y and Australia.

You migrated from Country Y to Australia.

After a number of years you were granted a permanent residency in Country S and Country V.

After residing in Australia, you left Australia to begin employment with a Country T entity at a mining site in Country T.

You entered Country T on an employer provided visa that allowed you to stay for an initial period of 12 months. After a period of 12 months the visa is required to be renewed every 6 months.

The conditions of your employment are such that you are on a rotating roster of a number of days on, followed by a number of days off.

During your time off you returned to your home in Australia.

The remuneration that you received from your employment in Country T included salary allowances, bonuses and superannuation.

While employed in Country T you lived in employer provided accommodation that you had exclusive use of.

Your assets in Australia consist of bank accounts, motor vehicle, investment properties and home.

Your home in Australia was being occupied by a caretaker who did not pay rent. When you returned to Australia during your rostered days off you returned to your home.

All your household and personal effects remained in your home.

You have lodged income tax returns with both the Country T and Australian authorities.

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

You had no intention of residing overseas.

While employed in Country T you have incurred accommodation and meal expenses.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 995-1

Reasons for decision

Residency

An Australian resident for tax purposes is defined in subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) to be 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.  These tests are:

● the resides test

● the domicile test

● the 183 day test

● the superannuation test.

The first two tests are examined in detail in Taxation Ruling No IT 2650 Income Tax: Residency - Permanent Place Of Abode Outside Australia.

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. 

However, where an individual does not reside in Australia according to ordinary concepts, they may still be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

The test that is relevant in your case is the domicile test.

The domicile test

If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. In order to show that an individual's domicile of choice has been adopted, the person must be able prove an intention to make his or her home indefinitely in that country. 

In your case you were born in Country Y, therefore your domicile of origin is Country Y. You then moved to Australia and became an Australian citizen; consequently Australia became your domicile of choice. From the information that you have provided you had not made any attempt to gain a more permanent residency status in Country T nor did you have any intention to remain there beyond your period of employment. Therefore your Australian domicile remains unchanged.

Permanent place of abode

The Commissioner's view on what constitutes a permanent place of abode is contained in Taxation Ruling IT 2650 Income Tax: Residency - Permanent place of abode outside Australia.

From the information that you have provided, while employed in Country T you live in employer provided on-site relevant accommodation. The Commissioner does not consider that this style of accommodation is consistent with establishing a permanent place of abode outside of Australia.

Therefore, as you have an Australian domicile and the Commissioner is not satisfied that you have established a permanent place of abode outside of Australia you have remained a resident of Australia for income tax purposes under the domicile test.

Your residency status

As were a resident of Australia under the domicile test outlined under subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997, you continued to be an Australian resident for taxation purposes for the period that you are living and working in Country T.

Assessable allowance

Sections 6-5 and 6-10 of the ITAA 1997 provide that the assessable income of a resident taxpayer includes ordinary income and statutory income derived directly or indirectly from all sources.

Section 15-2 of the ITAA 1997 includes in a person's assessable income all allowances provided in respect of, or for or in relation directly or indirectly to, any employment.

In your case, as part of your remuneration package you received a relocation allowance. The allowance you received was a definite predetermined sum. This amount could be more or less than the actual expenses that you incurred and was paid to assist in defraying the cost of your expenses. Further it was paid in connection with your employment. Therefore this payment constitutes an allowance.

As the amount paid is an allowance and not a reimbursement for relocation expenses incurred the amount does not constitute a fringe benefit under section 20 of the FBTAA.

Accordingly, the relocation allowance that you are in receipt of is assessable in Australia under section 15-2 of the ITAA 1997.

Double Tax Agreement

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.

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 T Agreement is listed in section 5 of the Agreements Act.

The Country T agreement is located on the relevant website in the Australian Treaties Series database. The Country T agreement operates to avoid the double taxation of income received by residents of Australia and Country T.

Article X of the Country T agreement advises that salaries, wages and other similar remuneration derived by a resident of Australia shall be taxable only in Australia unless the employment is exercised in Country T. If the employment is exercised in Country T then the income may also be taxed in Country T.

In your case you are an Australian resident who received an allowance from employment exercised in Country T. The Country T Agreement does not exclude the allowance from being from being taxable in Australia.

Accordingly, the relocation allowance is assessable in Australia under section 15-2 of the ITAA 1997.

Deductibility of relocation expenses

Section 8-1 of the ITAA 1997, allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.

Generally, accommodation, meal and relocation expenses are private or domestic in nature and therefore are a deductible expense.

In Lunney v. FC of T (1958) 100 CLR 478, the Full High Court laid down the principle that for a deduction to be allowable it is not enough for the expenditure to be an essential prerequisite to the derivation of assessable income. In that case it was held that the costs incurred by a taxpayer in travelling to the place where they work are expenses incurred in order to enable them to earn income but are not expenses incurred in the course of earning that income.

In your case, you stay in on site accommodation that is close to your workplace in Country T while maintaining your home in Australia. Whilst any expense incurred would not be incurred but for the distance of your work place from your home, any expense incurred is a prerequisite to the earning of assessable income. That is, it is incurred in order to put you in a position to be able to earn income, but it is not incurred in the actual course of gaining or producing that income. Expenses of this character are considered to be private or domestic in nature.

While it is acknowledge that you received a relocation allowance, the receipt of such an allowance does not automatically entitle you to a deduction.

Accordingly, consistent with the principles established in Lunney v. FC of T (1958) 100 CLR 478, you are not entitled to a deduction for accommodation, meal or relocation expenses under section 8-1 of the ITAA 1997.