Edited version of your written advice

Authorisation Number: 1051182930122

Date of advice: 20 January 2017

Ruling

Subject: Assessability of foreign income

Question

Is the income you receive from a company in Country X exempt from income tax in Australia?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 201Y

Year ended 30 June 201Z

The scheme commences on:

1 July 201X

Relevant facts and circumstances

You were born in Country X.

You are a citizen of Country X

You became an Australian permanent resident couple of years ago.

You travel to different countries for business purposes.

You have been spending more than 6 months per year overseas each year.

You enter Country X on your Country X's passport.

You hold business visas that allow you to enter the other overseas countries.

The business visas do not allow you to stay permanently.

While in Country X, you stay at your sibling's house.

You do not have a rental agreement with your sibling.

You do not pay rent to your sibling.

Your sibling's dwelling is available to you at all times.

You listed your sibling's address as your home address in your Country X's income tax returns.

You keep clothes in your sibling's house while you are not in Country X.

You stay at hotels or serviced apartments when you travel to the other overseas countries.

You do not intend to reside overseas permanently.

You lodged Australian income tax returns for these years.

You stated you are an Australian resident on these income tax returns.

You have not informed the Australian Electoral Commission or the Medicare that you were departing Australia.

You have not advised your private health insurance provider to have your policy suspended or cancelled.

You have a spouse

You have dependent children.

Your family does not accompany you overseas because all your trips are business related.

You own a residential property in Australia.

Your family lives in the property in Australia.

You have bank accounts, motor vehicles, and other investments in Australia.

Your household effects in Australia remain in your property in Australia.

Your personal effects in Australia remain in your property in Australia.

You have not advised any Australian financial institutions including any Australian companies with whom you have investments with that you are a foreign resident so that non-resident withholding tax can be deducted.

You lodged Country X's income tax returns while living overseas.

You stated you are a tax resident in Country X.

You are a director of an Australian company.

You receive salary and directors' fees from the Australian company.

You are a director of a company in Country X.

You receive salary and directors' fees from the company in Country X.

You maintain professional, social and sporting connections in Australia.

You have established professional, social and sporting connections in Country X.

You obtained a driver's licence in Country X.

Both you and your spouse are not Commonwealth Government of Australia employees for superannuation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953 Section 4

Income Tax Assessment Act 1997 Subsection 770-10(1)

Reasons for decision

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for income 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 offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are the:

● resides test

● domicile and permanent place of abode test

● 183 day test and

● Commonwealth superannuation fund test.

The primary test for deciding the residency status of each individual is whether they reside in Australia according to the ordinary meaning of the word resides.  If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian tax purposes has been established.

The resides (ordinary concepts) test

The outcomes of several Administrative Appeals Tribunal (AAT) cases have determined that the word 'resides' should be given the widest meaning and there have been a number of factors identified which can assist in determining if a particular taxpayer is a resident of Australia under this test.

Recent case law decisions have considered the following factors in relation to whether the taxpayer was a resident under the 'resides' test:

(i) Physical presence in Australia

(ii) Nationality

(iii) History of residence and movements

(iv) Habits and "mode of life"

(v) Frequency, regularity and duration of visits to Australia

(vi) Purpose of visits to or absences from Australia

(vii) Family and business ties to different countries

(viii) Maintenance of place of abode.

These factors are similar to those which the Commissioner has said are relevant in determining the residency status of individuals in Taxation Ruing IT 2650 - Income tax: residency - permanent place of abode outside Australia and Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia.

It is important to note that not one single factor is decisive and the weight given to each factor depends on individual circumstances.

In your case, you have been spending more than 6 months per year overseas each year. You maintain professional, social and sporting connections in Australia. You have established professional, social and sporting connections in Country X. You have a spouse. You have dependent children. Your family does not accompany you overseas because all your trips are business related. You are a director of an Australian company. You receive salary and directors' fees from the Australian company. You are a director of a company in Country X. You receive salary and directors' fees from the company in Country X.

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.

In the recent case of Iyengar v FCT 2011 ATC 10-222, the AAT held that the taxpayer was a resident of Australia, even though he was working overseas. The taxpayer's family ties, his intention (to complete his contract) and motive (to pay off his mortgage), and his maintaining an Australian place of abode while working overseas, were all indicative that he was an Australian resident during the relevant period.

To apply these rules in your case, you do not intend to reside overseas permanently. Your family does not accompany you overseas. Although you have been spending more than 183 days a year in overseas countries, you are a resident of Australia for income tax purposes under this test.

The domicile test

If a person's domicile is Australia they will be an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

Domicile is the place that is considered by law to be your permanent home. It is usually something more than a place of residence.

In order to show that a new domicile of choice in a country outside Australia 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 X and you are a citizen of Country X; therefore, your domicile of origin is Country X. Your domicile of choice is Australia as you became an Australian permanent resident and you have not returned to live in Country X permanently.

The expression 'place of abode' refers to a person's residence, where they live with their family and sleep at night. In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives.

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

The Commissioner is not satisfied that you have a permanent place of abode outside Australia for the following reasons:

● You do not intend to reside overseas permanently.

● While in Country X, you stay at your sibling's house.

● You stay at hotels or serviced apartments when you travel to the other overseas countries.

● Your family does not accompany you overseas because all yours trips are business related.

Therefore, you are a resident of Australia under this test.

The 183-day test

Where a person is present in Australia for 183 days during the year of income the person will be a resident, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

You have been spending more than 6 months per year overseas each year. You are not a resident under this test.

The superannuation test

An individual is still considered to be a resident if that person is eligible to contribute to the PSS or the CSS, or that person is the spouse or child under 16 of such a person. To be eligible to contribute to those schemes, you must be or have been a Commonwealth Government employee.

You are not a contributing member of the PSS or the CSS or a spouse of such a person, or a child under 16 of such a person. You are not a resident under this test.

Your residency status

Based on the facts you provided, you are a resident of Australia for income tax purposes under subsection 6(1) of the ITAA 1936.

Subsection 6-5(2) of the ITAA 1997 provides that assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year. Salary and wages are ordinary income for the purpose of subsection 6-5(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.

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 X agreement is listed in section 5 of the Agreements Act.

Article V of the Country X Agreement is a tie-breaker provision which applies to dual resident individuals, i.e. individuals who would otherwise be treated as residents of both Australia and Country X. 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.

Permanent home

In Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements, the Commissioner accepts that it is appropriate to have reference to the OECD Model Tax Convention and Commentary (OECD Commentary) which provides guidance on the interpretation of the terms used in double tax agreements.

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

● 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 (e.g. travel for pleasure, business travel, attending a course etc.).

● 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 situation, you have arranged to have the dwelling available to you at all times. Your home in Australia is also a permanent home.

As you have residences in both countries which are available at all times continuously for your use, you have a permanent home in Australia and in Country X.

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 are a director of an Australian company. You receive salary and directors' fees from the company. You are a director of a company in Country X. You receive salary and directors' fees from the company in Country X. Therefore, you have economic ties with both Australia and Country X. In addition, you have a spouse. You have dependent children. Your family does not accompany you overseas because all your trips are business related. Your family lives in Australia. Therefore, your personal ties are closer to Australia.

As a result, your economic and personal ties are closer to Australia. Accordingly, you will be treated as a resident of Australia for the purposes of applying the provision of the Country X Agreement to income earned by you during the period of dual residency.

Assessability of non-Australian sourced income

Article Y of the Country X Agreement provides that salary and wages derived by an individual who is a resident of Australia in respect of employment shall be taxable in Australia unless the employment is exercised in Country X. If the employment is exercised in Country X, the salary and wages may be taxed in Country X.

Article Z of the Country X Agreement provides directors' fees and similar payments derived by a resident of Australia as a member of the board of directors or any other similar organ of a company which is a resident of Country X may be taxed in Country X.

In your case, you are a director of a company in Country X. You receive salary and directors' fees from the company in Country X. Since your salary is paid by an employer who is a resident of Country X, your salary may be taxed in Australia and in Country X, and the directors fee you received from the company in Country X may also be taxed in Australia and Country X.

In conclusion, the income you received from Country X is not exempt from income tax in Australia.

Foreign income tax offset

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a foreign income tax offset for foreign tax paid in respect of an amount that is included in the person's assessable income in a year of income. It is not necessary that the payment of foreign income tax actually occurs in the claim year.

The availability of the foreign income tax offset is confirmed by the Country X Agreement which states in Article W that Country X's tax paid under the law of Country X and in accordance with this agreement in respect of income derived by a person who is a resident of Australia from sources in Country X shall be allowed as a credit against Australian tax payable in respect of that income.

Accordingly, you are entitled to a foreign income tax offset for the foreign tax paid on the income you received from Country X.