Edited version of private advice

Authorisation Number: 1051942842829

Date of advice: 1 February 2022

Ruling

Subject: Residency and foreign income

Questions and answers

Will you be a resident of Australia for tax purposes as defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the period of this ruling?

Yes.

Will you be a resident of both Australia and Country X for the purposes of the Double tax agreement between Australia and Country X (Country X Agreement)?

Yes.

Will you have a permanent home available to you in both Australia and Country X under the Country X Agreement?

Yes.

Will your personal and economic relations be closer to Country X and not Australia under the Country X Agreement?

Yes.

Will you be a resident of Country X under the Country X Agreement?

Yes.

Will you be a resident of Australia under the Country X Agreement?

No.

Will you be assessable on non-Australian rental income?

No.

Will you be assessable on non-Australian dividend income?

No.

Will you be assessable on non-Australian interest income?

No

Will you be assessable on non-Australian self-employment income?

No.

Will you be assessable on other income derived from sources outside Australia not dealt with by any specific Articleof the Country X Agreement?

No.

Will you be assessable on non-Australian trust income that is accumulated within foreign unit trusts?

No.

Will your Australian sourced dividends, interest and royalty income, whether derived personally or via trusts, be assessable in Australia and taxed at rates limited under the Country X Agreement?

Yes.

Is the first element of the cost base of your capital gains tax (CGT) assets that were not taxable Australian property equal to the market value of the assets at the time you became an Australian resident?

Yes.

Are you assessable on capital gains you make from the disposal of foreign shares or other foreign property not dealt with in the relevant paragraphs of the relevant Article of the Country X Agreement?

Yes.

Are you assessable on non-Australian trust income and capital gains?

No.

As a tax resident of Australia under domestic law, will you be liable for tax at resident rates and be eligible for any relevant tax offsets?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2021

Year ending 30 June 2022

Year ending 30 June 2023

The scheme commences on:

1 July 2020

Relevant facts and circumstances

You were born in Australia.

Your spouse was born in Country X and was naturalised in Australia many years later.

You and your spouse left Australia to live in Country X many years ago.

You were naturalised in Country X many years ago. You lost your Australian citizenship but regained it following amendments to the Citizenship Act.

You have been a resident of Country X under Country X domestic law for many years up to and including the most recent Country X tax year.

Based on your expected future travel patterns, you will continue to be a tax resident of Country X during the next two Country X tax years.

You have been a tax resident of Australia for about 10 years.

You and your spouse are contemplating whether to relocate to Australia to live on a permanent basis in the future.

You will decide on where you will settle once your adult children decide where to settle themselves. You have children who live in Australia and Country X.

You have spent the majority of each year in Australia for some years and intend to continue this pattern going forward.

Your intention of stay in Australia is holiday focussed away from your business in Country X (prior to its wind up). During your time in Australia, you live in your Australian home which you describe as a holiday home.

You have a home in Country X and both you and your spouse continue to live there when not in Australia or a third country. You jointly own the home with your spouse.

You have run a small business in Country X which is being wound up. You plan to continue doing a limited amount of fee-paying private client work while in Country X once the existing business transition is complete. You may also take on a mentoring/consulting role to some of your existing clients.

You will not be employed in Australia and will carry out part-time charity work and plan to undertake some part-time professional development.

You have a share portfolio in Country X which is professionally managed. The shares are in public companies that are incorporated outside Australia.

You are a unit holder in publicly quoted foreign unit trusts which are managed and controlled by trustees in Country X. Income is earned by the respective trustees with such underlying income and capital gains being accumulated in those trusts for reinvestment. The income is earned from sources in Country X and other countries. You are not presently entitled to any distribution.

You also have investments in Country X investment trusts, real estate investment trusts as well as shares in listed foreign companies, most of which are investment companies.

You jointly own two flats in Australia but do not derive income from these. You have an Australian joint bank account. You derive income from Australian sourced interest, dividends and royalties.

You will maintain your Country X drivers' licence, insurances, credit cards, bank accounts, health insurance, mobile phones, and internet service provider. You have household effects and motor vehicles that will remain at your home in Country X. This home will continue to be your postal address for service of bills.

Your extended family is in Australia, but you have no sporting connections in Australia. Your only social connections in Country X are those friends which you have made since moving to Country X.

Your activities in Australia include spending time with your extended family and participating in various leisure pursuits.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Section 99B

Income Tax Assessment Act 1936 Subsection 99B(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 6-20

Income Tax Assessment Act 1997 Section 115-25

Income Tax Assessment Act 1997 Subsection 855-40(1)

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Subsection 855-45(3)

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

International Tax Agreements Act 1953

Reasons for decision

Residency under domestic law - Question 1

Section 995-1 of the Income tax Assessment Act 1997 (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, as applied 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,

•                the domicile test,

•                the 183 day test, and

•                the superannuation test.

The primary test for deciding the residency status of an individual is whether they reside in Australia according to the ordinary meaning of the word resides.

Where an individual does not reside in Australia according to ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests.

The Resides test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3^rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'. These definitions have been highlighted in cases as being definitive observations of the meaning of resides (see Viscount LC in Levene v Commissioners of Inland Revenue [1928] AC 217 and Logan J in Stockton v Federal Commissioner of Taxation [2019] FCA 1679).

The observations contained in the case of Hafza v Director-General of Social Security (1985) 6 FCR 444 are also important:

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place - even involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248; and Keil v Keil [1947] VLR 383 - a person does not necessarily cease to be resident there because he or she is physically absent. The test is whether the person has retained a continuity of association with the place - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains " home ": see Norman v Norman (No 3) (1969) 16 FLR 231 at 235... [W]here the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as " home ", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

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

•                Physical presence

•                Intention or purpose of presence

•                Family and business/employment ties

•                Maintenance and location of assets, and

•                Social and living arrangements

These factors are similar to those which the Commissioner has said are relevant in determining the residency status of individuals in Taxation Rulings IT 2650 and TR 98/17.

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

In your case, you have been a resident of Australia for about 10 years and will continue to reside here as your behaviour will still reflect the required degree of continuity, routine or habit that is consistent with residing here.

You are a resident of Australia under the resides test.

As you are a resident of Australia under the resides test it is not necessary to consider the other residency tests.

Residency under the Country X Agreement - Questions 2-6

You are a resident of Australia for Australian income tax purposes and are also a resident of Country X for Country X income tax purposes.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also the relevant double tax agreement.

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.

An Article of the Country X Agreement sets out the tiebreaker rules for residency for individuals. The tiebreaker rules ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income under the double tax agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

Under the Article, the residency status of an individual will be determined as follows:

a)    that individual shall be taken to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests)

b)    if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national.

Permanent home

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. Paragraph 104 provides that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

Permanent home is not defined in double tax agreements. Therefore, recourse can be made to supplementary materials in order to aid construction. The OECD commentary to the Model Tax Convention is taken to be a legitimate aid to construction (Thiel v Commissioner of Taxation [1990] HCA 37: 171 CLR 338).

The OECD Commentary provides that in relation to a 'permanent home' 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 case you have a home available for your use in both Australia and Country X. Therefore, under the Country X agreement, it is evident that you have a permanent home in both Australia and Country X.

Personal and economic ties (centre of vital interests)

The OECD commentary states regard should be had to the taxpayer's family and social relations, their political, cultural or other activities, their place of business, the place from which they administer their property etc. As noted in Pike v Commissioner of Taxation [2020] FCAFC 158 at [39], the clause does not place greater weight on personal factors over economic factors. In each case it will be a matter of fact and degree as to whether a taxpayer's personal and economic relations, viewed as a whole, support ties closer to one contracting state over the other contracting state.

In your case, it is noted that you own real property in both Australia and Country X and also have family members in Australia and Country X. You also spend the majority of each year living with your spouse in Australia. However, you have significant investments in Country X and a significant income stream from Country X, and only derive nominal income from Australia.

Consequently, your personal and economic relations as a whole are closer to Country X than Australia.

Therefore, you will you be a resident of Country X, and not a resident of Australia, under the Country X Agreement.

Non-Australian income derived personally - Questions 7-11

As you are a Country X resident under the Country X Agreement, you will not be subject to tax in Australia on your non-Australian income from rent, dividends, interest, employment, or other income which you derive personally as per the respective Articles of the Country X agreement.

Income that is not taxable in Australia due to the provisions of a double tax agreement is treated as exempt income. Subsection 6-20(2) of the ITAA 1936 provides that ordinary income is exempt to the extent that this Act excludes it from being assessable income. 'This Act' is defined to include the ITAA 1936. Subsection 4(1) of the International Tax Agreements Act 1953 provides that 'the Assessment Act is to be incorporated and shall be read as one with this Act'. This means that the provisions of the two Acts are to be considered as if they are all in the one Act (Taxation Ruling TR 2002/9 paragraph 106).

Non-Australian trust income accumulated within foreign trusts - Question 12

You are a unit holder in publicly quoted foreign unit trusts which are managed and controlled by trustees in Country X. Income is earned by the respective trustees with such underlying income and capital gains being accumulated in those trusts for reinvestment. The income is earned from sources in Country X and from sources in other countries.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

However, as subsection 99B(1) can only apply where there has been a distribution or an amount of trust property applied, the provision does not apply to make income or capital gains accumulated in foreign trusts subject to tax.

Australian income from dividends, interest and royalties - Question 13

Under Article W of the Country X Agreement your Australian sourced dividends whilst being assessable to you, can only be taxed in Australia at a rate no more than X per cent of the gross amount of the dividends.

Under Article X of the Country X Agreement your Australian sourced interest whilst being assessable to you, can only be taxed in Australia at a rate no more than Y per cent of the gross amount of the interest.

Under Article Y of the Country X Agreement any Australian sourced royalties whilst being assessable to you, can only be taxed in Australia at a rate no more than Z per cent of the gross amount of royalties.

First element of the cost base - Question 14

The cost base of a CGT asset is made up of five elements. The first element constitutes the money or property given to acquire an asset.

If a non-resident individual becomes an Australian resident, a special acquisition rule applies in respect of certain CGT assets owned by the individual just before becoming a resident (section 855-45 of the Income Tax Assessment Act 1997 (ITAA 1997)). The acquisition rule provides that the taxpayer is treated as having acquired the asset at the time of becoming a resident (subsection 855-45(3) of the ITAA 1997). In your case, you became an Australian resident for tax purposes on 1 July 20XX.

However, the rule in section 855-45 of the ITAA 1997 does not apply to assets that are taxable Australian property or assets that were acquired before 20 September 1985 (subsection 855-40(1) of the ITAA 1997). The general cost base rules apply to any CGT assets that are taxable Australian property.

Capital gains from the disposal of foreign shares and other foreign property - Question 15

As a domestic tax law resident of Australia, you are assessable on your worldwide capital gains unless excluded under the Country X Agreement.

Article Z of the Country X Agreement provides that nothing in the Country X Agreement affects the application of a law of either Contracting State relating to the taxation of gains of a capital nature derived from the alienation of any property not dealt with in any of the other paragraphs of Article Z.

Therefore, capital gains you make from the disposal of any foreign shares or other foreign property not dealt with in the other paragraphs of Article Z will be included in your Australian assessable income.

You make a discount capital gain if a CGT event happens to a CGT asset that you acquired at least 12 months before the CGT event (section 115-25 of the ITAA 1997).

Note - any shares or other foreign property that were deemed to have been acquired by you on the day of your Australian tax residency have a cost base (first element) equalling their A$ value on that day.

Non-Australian trust income and capital gains - Question 16

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Therefore, distributions from foreign trusts that are referrable to income or capital gains are subject to tax under section 99B unless excluded by the Country X Agreement.

As there is no specific Article of the Country X Agreement that deals with trust distributions, the article of the Country X agreement concerning other income will apply to exclude any foreign trust distributions from tax in Australia.

Tax rates and tax offsets - Question 17

Australian tax residents are subject to resident tax rates on their Australian sourced income. Residents are also generally eligible to claim personal tax offsets in their income tax return where the conditions of each tax offset are satisfied.

As you are a resident for tax purposes, any Australian sourced income including income from real property derived by you will be subject to tax at resident tax rates. These tax rates include the tax-free threshold for the whole year. You are also eligible for tax offsets, provided the conditions of the tax offsets are satisfied.