Edited version of your written advice

Authorisation Number: 1051343899562

Date of advice: 9 April 2018

Ruling

Subject: Residency

Questions and answers

1. Are you resident of Australia for tax purposes?

No.

2. Is the compensation payment you received assessable as ordinary income?

Yes.

3. Is the compensation payment you received assessable as capital gain?

No.

This ruling applies for the following periods

Year ending 30 June 2017

The scheme commenced on

1 July 2016

Relevant facts and circumstances

Residency

You are an Australian citizen and your country of origin is Australia.

You and your partner (a foreign national) lived in Australia until you decided to relocate to a foreign country to live due to personal reasons and your partner having obtained a work contract in a foreign country.

You lived in a foreign country on a visa which did not allow you to work there. Then you obtained another visa that allows you to live and work in a foreign country.

You and your foreign partner had a civil union ceremony in a foreign country and later married.

You were granted a permanent residence card which is only available after living several years in a foreign country and could show you have assimilated into the life of that country.

You and your spouse have resided at your current address in a foreign country for several years.

You did not work between for several years due to visa restrictions. You do not hold a permanent job because of personal health issues and because you were the primary carer for your spouse when your spouse was undergoing medical treatment.

You came back to Australia at various times because of a court case with an insurance company. You were required to attend medical appointments, mediations and consult with your advisers. These trips were not a decision that you would have made if not required as your spouse was also undergoing medical treatments. When in Australia, you stay with relatives.

Neither you nor your spouse has ever been Australian Commonwealth government employee.

Your intention has been to reside in a foreign country permanently. To this end you have:

● Obtained a visa allowing you to stay permanently in a foreign country.

● Applied for a foreign country passport.

● Become part of the foreign country national health care system.

● Obtained private health insurance in a foreign country.

● Obtained a foreign country driving licence.

● Opened joint bank accounts with your partner since.

● Been learning a foreign country language in a government funded program made available only to foreigners living permanently in a foreign country who intend of making a life in a foreign country.

● Rented out your Australian property which is handled by a real estate agent.

● Removed your name from the Australian electoral roll in.

● Lodged tax returns in foreign country.

● Obtained multiple membership cards in your local stores and beauty shop.

● Resided in a foreign country for several years.

Compensation

When you were working in Australia, you were covered by two insurance policies:

● An income protection (IP): and

● A total and permanent disabled (TPD).

You were deemed unfit for work after a medical condition due to long term bullying and harassment at work.

As your health worsened by the stressful situation, your partner encouraged you to move to a foreign country when they took a new job in a foreign country. However, you were constantly under regular care and attendance of a medical practitioner even when you were in a foreign country.

As you have been unable to work you claimed income protection benefits on the basis that you are disabled as defined in the IP policy.

The insurance company paid income protection benefits for several years and then ceased paying the benefits.

You took legal action and lodge proceeding to claim for the unpaid benefits including the TPD benefits, plus damages.

The insurance company calculated your past and future entitlements to benefits under the IP policy. You have provided a copy of these calculations. After negations, your insurer offered to pay you a settlement sum, which you accepted.

You signed a Deed of Release and settlement funds were received.

As a condition of settlement, you gave up all rights to future claims and damages and agreed to the IP & TPD policies being cancelled.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 6-5

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

Income Tax Assessment Act 1997 Section 102-20

Reasons for decision

Residency

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (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 IT 2650 Income Tax: Residency - permanent place of abode outside Australia (IT 2650).

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 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 IT 2650 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.

Based on a consideration of all of the factors outlined above, you are not a resident of Australia according to ordinary concepts as you have not maintained a continuity of association with Australia since you moved to a foreign country.

The domicile and permanent place of abode test

Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia.

Domicile

A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. A person may acquire a domicile of choice in another country if they have the intention of making their home indefinitely in that country. The intention needs to be demonstrated in a legal sense, for example, by way of obtaining a migration visa, becoming a permanent resident or becoming a citizen of the country concerned.

As you are still an Australian citizen while living in a foreign country, your domicile origin is Australia. However, you have been granted permanent residency in a foreign country and have applied for a foreign country passport.

Your domicile was Australia but has become a foreign country as you are taking legal steps to change your domicile to that country.

Permanent place of abode

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 you intend to live for the rest your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere.

It is clear from the case law that a person’s permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case.

You have established a permanent place of abode in a foreign country as your presence there is permanent in nature.

The Commissioner is satisfied you have a permanent place of abode outside of Australia.

Therefore, you are not considered to be a resident of Australia under the ‘domicile and permanent place of abode’ test of residency.

The 183-day test

Under the 183 day test you are considered a resident of Australia if you are present in Australia for a total period of more than half of the year of income, i.e. 183 days, unless the Commissioner is satisfied that your usual place of abode is outside Australia and you do not intend to take up residence in Australia.

You have not been present in Australia for a total period of more than half of the year of income.

Therefore you are not a resident of Australia under the 183-day test.

The superannuation test

An individual is considered to be a resident if that person is eligible to contribute to the Public Service Superannuation Scheme (PSS) or the Commonwealth Service Superannuation Scheme (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 have stated that neither you nor your spouse is eligible to contribute to the PSS or the CSS. Further, you are more than 16 years of age. Therefore, you are not a resident of Australia under the superannuation test.

Your residency status

As you are not a resident of Australia under any of the tests of residency outlined in subsection 6(1) of the ITAA 1936 and subsection 995-1(1) of the ITAA 1997, you are not an Australian resident for taxation purposes.

Residency and double tax agreements

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 agreement (DTA).

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 Australia-a foreign country DTA (the foreign country agreement) is listed in section 5 of the Agreements Act.

The foreign country agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The foreign country agreement operates to avoid the double taxation of income received by residents of Australia and a foreign country.

Article 20 of the foreign country agreement addresses other income. Paragraph 1 of Article 20 states:

1. Items of income of a resident of a Contracting State wherever arising which are not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

As compensation payments are not dealt with in the previous articles of the foreign country agreement, this paragraph would make the compensation you received taxable only in a foreign country. However, Paragraph 3 of Article 20 states:

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing Articles of this Convention from sources in the other Contracting State may also be taxed in the other Contracting State.

The effect of Paragraph 3 is that your compensation may be taxed in Australia.

Compensation

Subsection 6-5(3) of the ITAA 1997 provides that the assessable income of a foreign resident includes their Australian sourced income.

Ordinary income has been held to include income from providing personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

● are earned

● are expected or relied upon

● have an element of periodicity, recurrence or regularity

● replace income.

Payments of salary and wages are income according to ordinary concepts and are included in assessable income under section 6-5 of the ITAA 1997.

An amount paid to compensate for loss generally acquires the character of that for which it is substituted. Compensation payments which substitute income have been held by the courts to be income under ordinary concepts.

Taxation Determination TD 93/58 Under what circumstances is the receipt of a lump sum compensation/settlement payment assessable? (TD 93/58) outlines the circumstances under which the receipt of a lump sum compensation/settlement payment is assessable as ordinary income. The determination states that where the compensation payment is for loss of income, the amount is assessable as ordinary income. Where a portion of a lump sum payment is identifiable and quantifiable as income, that portion of the payment will be assessable.

In your case, you received compensation. The compensation paid was for loss of the regular payment of benefits under your income protection policy. As the payment was to compensate for loss of earnings, is assessable as ordinary income under subsection 6-5(3) of the ITAA 1997 in the income year it was received.

There is no need to consider the capital gains tax implications of your compensation payment. As the compensation payment you received is assessable as ordinary income, it will not be assessable as a capital gain.

If your compensation is also assessable in a foreign country, you may be entitled to claim a credit in a foreign country for the tax you paid in Australia.