Edited version of your written advice

Authorisation Number: 1051291875285

Date of advice: 6 October 2017

Ruling

Subject: Residency and foreign source income

Question 1

Are you a resident of Australia for taxation purposes?

Answer

Yes

Question 2

Are the housing assistance payments you received from foreign employment assessable income?

Answer

Yes

Question 3

Are you entitled to a deduction for the renting expenses in foreign territory X (house reimbursement)?

Answer

No

This ruling applies for the following period:

Year ended 30 June 201Y

The scheme commences on:

1 July 201X

Relevant facts and circumstances

Your country of origin is Australia.

You are a citizen of Australia and Country A.

You were offered a position of Manager in foreign territory X.

You were employed from mid 201X to mid 201Y.

You and your spouse departed for foreign territory X in mid 201X.

Your intention when you departed Australia was to leave Australia for a number of years.

You entered foreign territory X on a work visa which does not allow you to stay permanently; you have to renew your work visa every 2 years.

Your work visa was sponsored by your employer.

Your employer did not provide you with accommodation; you and your spouse rented an apartment.

You came back to Australia for Christmas; you were not accompanied by your spouse.

You were offered a position with Australian Government, and you and your spouse moved back to Australia.

You took your personal effects to foreign territory X.

You opened a bank account in foreign territory X, which was used for savings and salary payments.

You bought furniture, cooking equipment and a mattress etc. in foreign territory X.

You have two properties in Australia; both properties were rented out while you were away.

Your household effects were put in storage in Australia.

You have bank accounts and shares in Australia.

You did not advise the Australian Electoral Commission that you were departing Australia.

You did not advise Medicare to have your name removed from their records.

You did not suspend or cancel your private health insurance.

You did not advise any Australian financial institutions that you were departing Australia.

You and your spouse are not eligible employees in the Commonwealth Superannuation Scheme (CSS) or Public Sector Superannuation Scheme (PSS).

You received basic salary, housing assistance, a bonus and a per diem allowance.

The housing assistance was paid each month to you and you used it to pay part of the private rental accommodation.

Under foreign territory X tax law, you are required to include housing assistance as your taxable income. However, if you are renting private accommodation, the housing assistance is then classified as a housing reimbursement from the date started renting and is deductable.

You provided employment contract, Clause 3 discusses Housing Assistance.

Clause 3 provides that you are required to furnish the Company with a copy of the stamped lease agreement(s), rental, rates and management fee receipts, where applicable. Any portion of the housing assistance not used as rent will be treated as a taxable cash allowance.

You lodged Salaries Tax return and paid tax in foreign territory X.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

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

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 8-1

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for taxation 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 (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 Ruling 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 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.

In your case, you were employed as a manager; you entered foreign territory X on a work visa which was sponsored by your employer; the visa allows you to stay for 2 years and you have to renew it every 2 years; you and your spouse stayed in a rented apartment in foreign territory X; you rented out your properties in Australia while you were away.

Based on the facts, you are not residing in Australia according to ordinary concepts. Therefore, you are not a resident of Australia for taxation purposes under this test.

The domicile (and permanent place of abode) test

Under this test, a person whose domicile is Australia will be considered a resident of Australia for taxation purposes; 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 to prove an intention to make his or her home indefinitely in that country.

In your case, your domicile of origin is Australia and there is no evidence to suggest that you established a new domicile in foreign territory X. Therefore, your domicile is Australia.

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.

IT 2650 provides that a taxpayer who leaves Australia with an intention of returning to Australia at the end of a transitory stay overseas would remain a resident of Australia for income tax purposes unless he or she can satisfy the Commissioner that during the year of income his or her permanent place of abode was outside Australia. What constitutes a mere transitory stay overseas for these purposes would vary with the circumstances of each case. However, as a general proposition, an overseas stay for a duration of less than 2 years would be considered as being of a transitory nature.

You are a resident of Australia for taxation purposes under this test.

The 183-day test

Under this test, a person who is in Australia for 183 days (not necessarily consecutively) during an income year may be a resident of Australia for taxation purposes, unless the Commissioner is satisfied the person’s usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

You are not a resident of Australia for taxation purposes under this test as you were not in Australia for 183 days or more while you were based in foreign territory X.

Superannuation test

Based on the information you have provided, you and your spouse are not eligible employees in the Commonwealth Superannuation Scheme (CSS) or Public Sector Superannuation Scheme (PSS).

You are not a resident of Australia for taxation purposes under this test.

Conclusion – your residency status

Based on the facts you have provided, you met the domicile (and permanent place of abode) test, you are a resident of Australia for taxation purposes.

Question 2

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of an Australian resident includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business.

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.

The housing assistance payments you received are ordinary income for the purpose of subsection 6-5(2) of the ITAA 1997, therefore, it is assessable income.

Question 3

Section 8-1 of the ITAA 1997 allows a deduction for a loss and outgoing to the extent that it is incurred in gaining or producing assessable income. However, a loss or outgoing is not deductible if it is of a capital, private or domestic nature, or it is incurred in gaining or producing exempt income.

In general, accommodation expenses are considered private expenses and consequently are not deductible. Although the expenditure must be incurred in order to put one in a position to be able to derive assessable income, it does not necessarily mean that the expenditure is incurred in the course of gaining or producing that income.

Accordingly, you are not entitled to a deduction for the renting expenses (house reimbursement).

Further information

Foreign income tax offset (FITO)

Subsection 770-10(1) of the ITAA 1997 provides that a person is entitled to a FITO 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.

To determine the amount of FITO in any particular year, a person must first calculate the total foreign income tax paid on amounts included in their assessable income for the year.

The tax offset has the effect of reducing the Australian tax that would otherwise be payable on the double-taxed amount. A FITO is a non-refundable tax offset.

The FITO rules do not allow for the carry forward of excess foreign tax. This means that all available FITO will need to be utilised in the year in which they arise. There will be no opportunity to carry them forward for use against future Australian tax on foreign income.

Furthermore, there is a FITO limit. Where the total foreign income tax paid by a person is less than or equal to $1,000, the person is not required to calculate the FITO, i.e. the person's FITO will equal the foreign income tax paid on amounts included in the their assessable income.

Where the total foreign income tax paid is more than $1,000, the person can choose to offset only $1,000 of foreign tax (and not formally calculate the FITO entitlement) or calculate the offset limit to determine the maximum FITO entitlement.

More information can be found on our web site at www.ato.gov.au and by typing in QC 51238.

Foreign exchange rates

All foreign income, deductions and foreign tax paid must be translated (converted) to Australian dollars before including it in your return.

More information can be found on our web site at www.ato.gov.au and by typing in QC 16583.