Edited version of private advice

Authorisation Number: 1051963176355

Date of advice: 29 March 2022

Ruling

Subject: Residency

Question 1

Are you an Australian resident for taxation purposes from the date of your arrival in Australia?

Answer

Yes, see reasons for decision.

Question 2

Will you be required to include overseas employment income received between your date of arrival and the end of that financial year in your Australian income tax return for the relevant income year?

Answer

Yes, an Australian resident for tax purpose is required to include their worldwide income, which includes overseas employment income, in their income tax return for the relevant year. As you are an Australian resident for tax purposes from your arrival in Australia onwards, your worldwide income will need to be included in your income tax return.

Question 3

Are any of the payments made by your previous employer to you considered to be employment termination payments as defined in section 82 130 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No, see reasons for decision.

Question 4

Will you be required to include employment income received after your arrival date in Australia relating to the previous year when he was a non-resident of Australia (and taxed by Country X authorities) in your Australian income for the relevant financial year?

Answer

Yes, income is earned when it is received therefore income received after you became an Australian resident will need to be included in the Australian income tax return for the relevant year.

Question 5

Will any capital gain on the sale of the shares by you be assessable income in the relevant financial year and be required to be included in your Australian income tax return?

Answer

Yes, see reasons for decision.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 2019

Relevant facts and circumstances

You are an Australian citizen

You have been living and working overseas for over 20 years and most recently had been living and working in Country X for over 10 years.

You and your family always intended to return to Australia permanently but there was no set timeframe on their return due to uncertainty surrounding long term employment arrangements

You were employed by your previous employer in Country X. You were considered a resident for tax purposes in Country X throughout the period of employment.

Your employment concluded in late 20XX. The termination agreement in place between you and your previous employer meant there was an 'early retirement'. During that time, you were not permitted to work for any other company, and the final release of your employment arrangement was end of a month in the following year.

You would have stayed in Country X to complete the employment period or would have relocated to Australia and travelled back to Country X but the complications of Covid-19 prevented this.

You were regarded by Country X authorities as a taxpayer until they formally released you from final taxes and your visa was returned which was at the end of your employment.

You and your family relocated to Australia on with the intention to remain permanently in Australia.

You had no employment organised on your return to Australia, and no plans to be employed during the period the termination agreement covered.

You and your family had purchased a residence in Australia prior to moving back to Australia.

You lived in rental accommodation in Country X, with a five-year residential lease but was terminated early after just one year when you decided to return to Australia.

Barclays deferred your final employment related payments and they were paid at approximately one month intervals through the period covered by your termination agreement Country X tax was paid on the amounts received

You purchased a number of shares while you were still an employee of the company with your own funds, with the intention of holding them for longer than three years and having the employer, 'match' the shares effectively receiving double the shares as per the share purchase agreement with your company. These shares were fully vested and access was unrestricted but to obtain the "matching shares" benefit you would have needed to hold them for another approximately two years.

Section 32 of the Termination Agreement covers the shares issued under the employee incentive scheme, referred to as the Share purchase scheme

You did not hold the shares for three years and were required to sell them at the market price. You sold these shares for market value just after your employment ended. Proceeds were XXXX after fees and brokerage.

You have lodged your final Country X tax return for year commencing during the period covered by your termination agreement to your recognised employment exit date.

You have a transactional account in Country X and pension funds with which was accumulated from Country X earnings while you lived and worked there.

You have bank accounts and investments in Australia.

In addition to your residence, you also own a rental property in Australia which you have held for some of the period while you lived overseas.

You and your spouse are not Australian government employees for superannuation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936Subsection 6(1)

Income Tax Assessment Act 1997 Division 82

Income Tax Assessment Act 1997 Section 82-130

Income Tax Assessment Act 1997 Section 82-135

Income Tax Assessment Act 1997 Subdivision 83A-20

Income Tax Assessment Act 1997Section 995-1

International Tax Agreements Act 1953

Reasons for decision

Question 1

Were you an Australian resident for tax purposes from your arrival in Australia?

Summary

Yes.

Detailed reasoning

Section 995-1 of the ITAA 1997 defines an Australian resident for 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, 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 Ruling IT 2650 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 each individual's circumstances.

We consider that your circumstances are consistent with residing in Australia.

This is because:

•           You returned to Australia on with your spouse with the intention to permanently reside in Australia

•           You purchased a residence in Australia prior to moving back to Australia.

•           You terminated the rental agreement on the property in Country X early when you returned to Australia.

You are a resident of Australia under the resides test.

Domicile test

Under the domicile test, you are a resident of Australia if your domicile is in Australia unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

Domicile

Whether your domicile is Australia is determined by the Domicile Act 1982 and the common law rules on domicile.

Your domicile is your domicile of origin (usually the domicile of your father at the time of your birth) unless you have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and you must hold the positive intention to make that country your home indefinitely. Your domicile continues until you acquire a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

In your case, you were born in Australia and your domicile of origin is Australia. Although you may have acquired a domicile of choice in Country X, there is currently insufficient evidence for the Commissioner to determine this.

Permanent place of abode

If you have an Australian domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place of abode is outside Australia. This is a question of fact to be determined in light of all the facts and circumstances of each case.

'Permanent' does not mean everlasting or forever, but it is to be distinguished from temporary or transitory.

The courts have held that the phrase 'permanent place of abode' calls for a consideration of the town or country where a person is located. It does not extend to more than one country, or a region of the world.

The Full Federal Court in Harding v Commissioner of Taxation [2019] FCA 29 held at paragraphs 36 and 40 that key considerations in determining whether a taxpayer has his or her permanent place of abode outside Australia are:

(a)  whether the taxpayer has definitely abandoned, in a permanent way, living in Australia; and

(b)  whether the taxpayer is living permanently in a specific country.

Paragraph 23 of Taxation Ruling IT 2650 Residency - Permanent place of abode outside Australia sets out the following factors which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode:

(a)   the intended and actual length of the taxpayer's stay in the overseas country;

(b)   whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

(c)   whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

(d)   whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

(e)   the duration and continuity of the taxpayer's presence in the overseas country; and

(f)    the durability of association that the person has with a particular place in Australia, i.e. maintaining assets in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

As with the factors under the resides test, no one single factor is decisive, and the weight given to each factor depends on the individual circumstances.

The Commissioner is not satisfied that your permanent place of abode is outside Australia. This takes into account that:

•           You and your spouse moved to Australia

•           The lease for the residential property in Country X was terminated when you left that country

•           You purchased a property to live in with your spouse in Australia on your return

You are a resident of Australia under this test.

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 in Australia for 183 days or more in the 2021 income year. We now need to consider whether we are satisfied that, during the 2021 income year, your usual place of abode was outside Australia and your intention was to take up residence in Australia.

In the context of the 183 day test, a person's usual place of abode can include both a dwelling or a country where the person usually resides. A person can have only one usual place of abode under the 183- day test. However, it is also possible that a person does not have a usual place of abode. This is the person who merely travels through various countries without developing any strong connections.

If a person has places of abode both inside and outside Australia, then a comparison may need to be made to determine which is their usual place of abode. When comparing two places of abode of a particular person, it is necessary to examine the nature and quality of the use which the person makes of each particular place of abode. It may then be possible to determine which is the usual one, as distinct from the other or others which, while they may be places of abode, are not properly characterised as the person's usual place of abode (Emmett J at [78] in Federal Commissioner of Taxation v Executors of the Estate of Subrahmanyam [2001] FCA 1836).

To determine whether you intended to take up residence in Australia, we look at evidence of relevant objective facts.

Based on the circumstances, the Commissioner is not satisfied that your usual place of abode was outside Australia for the relevant income year and that he did not intend to reside in Australia.

This takes into account that:

•                    You and your spouse moved back to Australia

•                    You purchased a property for yourself and your spouse to live in on their return to Australia

•                    The lease for the residential property in Country X was terminated

You are a resident of Australia under this test.

Superannuation Test

An individual is a resident of Australia if they are either a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976, or they are the spouse, or the child under 16, of such a person.

You are not a contributing member of the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) or a spouse of such a person, or a child under 16 of such a person.

Therefore, you are not a resident under this test.

Conclusion

You satisfy the resides, domicile and 183 days tests of residency and so you are a resident of Australia for income tax purposes from your arrival in Australia

Additional question: Double Taxation 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.

Article 4.2 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.

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then that individual's status shall be determined as follows:

a) the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; if a permanent home is available in both States, 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 State in which the centre of vital interests is situated cannot be determined, or if a permanent home is not available to the individual in either State, the individual shall be deemed to be a resident only of the State in which that individual has an habitual abode;

c) if the individual has an habitual abode in both States or in neither of them, the individual shall be deemed to be a resident only of the State of which the individual is a national;

d) if the individual is a national of both States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

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 (see also ATO ID 2003/1195).

Permanent home is not defined in the Double Tax Agreement. 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':

•                    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) For instance, a house owned by an individual cannot be considered to be available to that individual during a period when the house has been rented out and effectively handed over to an unrelated party so that the individual no longer has possession of the house and the possibility to stay there

•                    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.

You purchased a home in Australia to live in and ended the lease on the residential property in Country X early upon your return to Australia. You no longer had a permanent home in Country X upon the lease ending and did have one in Australia from the time of purchase. Therefore, you had a permanent home in Australia and not Country X.

Habitual abode

The OECD commentary provides that in determining a taxpayer's habitual abode, it requires a determination of whether the individual lived habitually, in the sense of being customarily or usually present, in one of the two States but not in the other during a given period.

The test will not be satisfied simply by determining in which of the two Contracting States the individual has spent more days during the period (JJ Davies, White and Steward in Pike v Commissioner of Taxation [2020] FCAFC 158 at [29]).

The notion of habitual abode refers to the frequency, duration and regularity of stays that are part of the settled routine of an individual's life and are therefore more than transient. It is possible for an individual to have an habitual abode in two states where the individual was customarily or usually present in each State during the relevant period.

You were customarily or usually present in Australia from the point of arrival. You did not return to Country X due to the COVID-19 restrictions to wind up employment duties and lived in Australia permanently from arrival.

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.

You moved back to Australia permanently with your spouse, maintained a rental property in Australia and purchased a residential property in Australia which was maintained and lived in from your arrival in Australia.

Your termination period continued with your employer after your arrival in Australia but you did not actively carry out employment duties during this period.

Conclusion

The result of the tie breaker test is that you are only a resident of Australia for the purposes of Country X Agreement from your arrival in Australia.

Question 3

Are any of the payments made by your previous employer to you considered to be employment termination payments as defined in section 82-130 of the ITAA 1997?

Answer

No

Detailed reasoning

Division 82 of the ITAA 1997 sets out how ETPs are treated for income tax purposes.

A payment is an ETP if it satisfies all the requirements in section 82 130 of the ITAA 1997 and is not specifically excluded under section 82 135.

Subsection 82 130(1) of the ITAA 1997 states:

A payment is an employment termination payment if:

(a) it is received by you:

(i) in consequence of the termination of your employment; or

(ii) after another person's death, in consequence of the termination of the other person's employment; and

(b) it is received no later than 12 months after that termination (but see subsection (4)); and

(c) it is not a payment mentioned in section 82 135.

Section 82 135 of the ITAA 1997 provides that certain payments are not employer termination payments. Relevantly, these include (among others):

•                    unused annual leave or long service leave payments; and

•                    reasonable capital payments for, or in respect of, personal injury.

In consequence of termination of employment

The phrase 'in consequence of' is not defined in the ITAA 1997. However, the courts have interpreted the phrase in a number of cases. Whilst the courts have divergent views on the meaning of this phrase, the Commissioner's view on the meaning and application of the 'in consequence of' test are set out in Taxation Ruling TR 2003/13 Income tax: eligible termination payments (ETP): payments made in consequence of the termination of any employment: meaning of the phrase 'in consequence of' (TR 2003/13).

While TR 2003/13 contains references to repealed provisions, some of which may have been rewritten, the ruling still has effect as both the former provision under the Income Tax Assessment Act 1936 and the current provision under the ITAA 1997 both use the term 'in consequence of' in the same manner.

In paragraphs 5 and 6 of TR 2003/13 the Commissioner states:

5.... a payment is received by a taxpayer in consequence of the termination of the taxpayer's employment if the payment 'follows as an effect or result of' the termination. In other words, but for the termination of employment, the payment would not have been received by the taxpayer.

6. The phrase requires a causal connection between the termination and the payment, although the termination need not be the dominant cause of the payment. The question of whether a payment is received in consequence of the termination of employment will be determined by the relevant facts and circumstances of each case.

In your case, they were employed on a full-time basis with the former employer.

You entered into an Agreement with your former employer, in which your employment with the former employer was to cease on the termination date.

In accordance with item 3 of the Agreement, you were released from the obligation to come to the office. Following your Last Day in the Office and until and including the Termination Date, you were placed on "Garden Leave".

During a period of Garden Leave, an employee is required to serve out a period of notice 'at home', away from the work premises. The former employer can still call on the skills of the employee if required and the employee remains on the employer's payroll even though not permitted to attend the premises nor to commence any other employment during the period of Garden Leave.

As per the facts in this case, you were placed on Garden Leave until your termination of employment. You remained an employee of the former employer, bound by the terms and conditions of your employment, as stipulated in item 3 of the Agreement.

Further, you were given proper notice of the termination date of your employment, and told you were not required to attend the premises of the former employer until the Termination Date. Under item 3 of the Agreement, you: could perform work if specifically requested to do so; were to make yourself available to the former employer should any information be needed regarding any work related matter; and were not permitted to undertake any employment with a new employer or provide services as a self-employed contractor to any organisation or take up work in any capacity, unless released to do so by the former employer.

You were therefore still employed by the former employer during the Garden Leave period. You remained on the former employer's 'payroll', even though you were not permitted to attend the work premises. Under Garden Leave, salaries and benefits continue until the end of the leave period, where the employee remains on the payroll, whilst in the process of terminating their employment. Your employment was not officially terminated until the termination date, as stipulated in the Agreement, and as confirmed by you.

In this case, the payments by the former employer to you were not connected to your termination. The latter payments were in a respect of a period in which you were placed on Garden Leave and before your termination of employment

The termination of your employment was not the cause of the latter payments to you. It cannot be argued that the latter payments followed 'as an effect or result of' your termination, or that 'but for the termination' of your employment those payments would not have been made to you. There is no causal connection between your termination date and the four payments made, before your termination of employment date.

Further, item 2 of the Agreement confirms that your salary was to be paid and that you were to continue to receive your benefits in the usual way up to and including the Termination Date when they would cease (except as set out in the Agreement). No other sums were due to you from the former employer, other than as set out in the Agreement.

As the relevant payments were not 'in consequence of' the termination of your employment with the former employer, those amounts are not ETPs. Accordingly, subparagraph 82 130(1)(a)(i) in relation to the latter payments is not satisfied.

As subparagraph 82 130(1)(a)(i) has not been satisfied in relation to any of the payments to be made by the former employer to you, the payments are not ETPs as defined in section 82 130 of the ITAA 1997.

Question 5

Will any capital gain made on the sale of the shares be assessable income in the relevant financial year and be required to be included in your Australian income tax return?

Answer

Yes

Detailed Reasoning

Paragraph (1) of subsection 83A-20 of the ITAA 1997 states the following:

83A-20Application of subdivision

This subdivision applies to an ESS interest if you acquire the interest under an employee share scheme at a discount

Therefore, the Employee Share Scheme (ESS) tax rules do not apply to ESS interests that are not discounted.

Your previous employer offered their employees an arrangement meaning that if an employee holds their shares for three years, they will issue a matching number of shares to the employee.

The shares were purchased with your own after tax funds on before the termination of your employment at market value with the benefit only to be received if the shares were held for three years. You were required to sell the shares at market value at the time as part of the termination agreement before the three year period had been completed. You sold the shares on proceeds totalling were XXXX after fees and brokerage. This meant you received no benefit or discount from the purchase and sale of the shares by being an employee of the company. Therefore, as there was no discount or benefit applied to the shares the ESS rules do not apply.

You will need to include the capital gain from the sale of the shares in the income tax return for the relevant year.