Edited version of private advice

Authorisation Number: 1051989442476

Date of advice: 11 July 2022

Ruling

Subject: Residency and taxation of employment income

Question 1

Were you a foreign resident for Australian taxation purposes?

Answer

No.

Question 2

Were you a foreign resident for the purposes of the tiebreaker test in Country A's Double Tax Agreement?

Answer

Yes.

Question 3

Is the employment income you derived from your employment in Country A assessable in Australia?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are an Australian citizen and were born in Australia.

You are a permanent resident of Country A and have a skilled labour visa.

You are an international airline pilot for an airline company based in Country A. You are employed on a permanent basis.

You lodged your previous income tax returns as an Australian resident for tax purposes and declared employment income.

You lodged income tax returns in Country A as a resident for taxation purposes and declared employment income.

Prior to your departure, you had a flexible roster that allowed you to return to Australia on a regular basis.

You departed Australia to Country A to recommence working with your employer, as you had done numerous times over the years.

Country A brought COVID-19 travel restrictions for going in and out of the country. You could have flown back to Australia after completing your next trench of flying but would not be able to fly back to Country A to resume working.

You had intended to return to Australia after you departed for your children's birthdays. However, you were uncertain exactly when you would be able to return to Australia.

You decided to stay in Country A until their travel restrictions eased. You returned to Australia two years after departure and left again after a period of time to continue working in Country A.

You have a main residence in Australia where your family resides. When you returned to Australia, you returned to your main residence.

Your long term intentions were to reside in Australia with your family.

You have had a long term lease on an apartment in Country A. You lived in the apartment for the majority of the time apart from a few overnight stays in other parts of Country A.

in Country A you have a bank account, basic household furniture and personal effects. Your belongings remain in Country A when you returned to Australia apart from some personal effects.

In Australia you have a house, car, bank accounts, household effects, superannuation and shares which do not produce assessable income.

You do not receive any income from Australian sources.

Your family did not accompany you to Country A as you prefer to raise your family in Australia. You commuted frequently to Australia before the COVID-19 pandemic.

You financially support your family in Australia.

You only have your family as your main social connection to Australia.

You occasionally catch up with your friends when your roster allows you in Country A. You had a gym membership but have since cancelled this.

You and your spouse are not contributing members of the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS).

You have not taken your name off the Australian electoral roll.

No foreign resident withholding tax has been taken from your Australian investments or bank accounts.

You are still enrolled in Medicare and health insurance.

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)

International Tax Agreements Act 1953 Sections 4 and 5

Reasons for decision

Question 1

Overview of the law

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 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 (also referred to as the ordinary concepts test)

•         the domicile test

•         the 183-day test, and

•         the Commonwealth superannuation fund test.

The resides test is the primary test for deciding the residency status of an individual. This test considers whether an individual resides 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 domicile test, 183-day test and Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in Taxation Ruling IT 2650 Income tax: residency - permanent place of abode and Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia.

We have considered the statutory tests listed above in relation to your situation as follows:

The resides test

The ordinary meaning of the word 'reside' has been expressed as 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place': See Commissioner of Taxation v Miller (1946) 73 CLR 93 at 99 per Latham CJ, citing Viscount Cave LC in Levene v Inland Revenue Commissioners [1928] AC 217 at 222, citing the Oxford English Dictionary. Likewise, the Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

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.

The Commissioner considers the following factors in relation to whether a taxpayer is a resident under the 'resides' test:

•         period of physical presence in Australia

•         intention or purpose of presence

•         behaviour while in Australia

•         family and business/employment ties

•         maintenance and location of assets

•         social and living arrangements.

It is important to note that no one single factor is decisive, and the weight given to each factor depends on each individual's circumstances.

Because the ordinary concepts test is whether an individual resides in Australia, the factors focus on the individual's connection to Australia. Having a connection with another country, or being a resident of another country, does not diminish any connection to Australia: Logan J in Pike v Commissioner of Taxation [2019] FCA 2185 at 57 reminds us that 'it is no part of the ordinary meaning of reside in the 1936 Act that there be a "principal" or even "usual" place of residence. ... It is important that ... "resident" not be construed and applied as if there were such adjectival qualifications.' For this reason, the test is not about dominance or exclusivity.

Application to your situation

We have taken the following into consideration when determining whether you meet the resides test:

•         Your intention was to reside in Australia long term with your family and to return to Australia as soon as travel restrictions in Country A had eased. You did not have an intention to migrate to Country A permanently.

•         You commuted to and from Australia frequently to resume residing with your family prior to the COVID-19 pandemic.

•         You made a choice to stay in Country A due employment and pandemic related travel restrictions in Country A.

•         You have strong family ties to Australia with your spouse and children residing in Australia. You are financially supporting your family while working in Country A.

•         You have a main residence in Australia where you reside when you are in Australia.

•         You maintain the majority of your assets in Australia which includes a motor vehicle, property, household effects, personal effects and shares.

•         You have minimal social, sporting or community ties with Country A.

You maintained strong ties with Australia throughout your absence. You were a resident of Australia for taxation purposes prior to the ruling period. Your stay in Country A for an extended period of time due to travel restrictions in Country A does not change your residency status.

You are a resident of Australia under the resides test for the ruling period.

Although the law only requires you to be considered a resident under one test, for completeness the other tests are also considered.

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 in 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 a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and 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.

Application to your situation

In your case, you were born in Australia and your domicile of origin is Australia.

It is considered that you did not your domicile of origin in Australia and acquire a domicile of choice in Country A. You obtained permanent residency in Country A; however, you do not intend to reside there permanently.

Therefore, your domicile is Australia.

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 phrase 'permanent place of abode' calls for a consideration of the physical surroundings in which you live, extending to a town or country. 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 their permanent place of abode outside Australia are:

•         whether the taxpayer has definitely abandoned, in a permanent way, living in Australia

•         whether the taxpayer is living in a town, city, region or country in a permanent way.

The Commissioner considers the following factors relevant to whether a taxpayer's permanent place of abode is outside Australia:

(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.

Application to your situation

We have taken the following into consideration when deciding whether your permanent place of abode is outside Australia:

•         You have been physically absent from Australia for a substantial amount of time.

•         Your intention was to return to Australia and resume living in Australia with your family as soon as travel restrictions allowed you to do so.

•         You have a long term lease for an apartment in Country A for a number of years which you intend to reside in while employed. This apartment is furnished with basic household effects and personal effects.

•         You have an established main residence in Australia which your family continued to live in during your absence. You returned to your main residence after returning to Australia.

•         You have a limited association with Country A as you were there mainly for employment purposes. You have minimal assets and social ties with Country A.

•         You have a strong association with Australia as you still maintain the majority of your assets, have not taken any steps to sever ties with Australia and have strong family ties.

The Commissioner is not satisfied that your permanent place of abode is outside Australia.

Therefore, you are a resident of Australia under the domicile test.

183-day test

Where a person is present in Australia for 183 days or more during the year of income the person will be a resident, unless the Commissioner is satisfied that both:

•         the person's usual place of abode is outside Australia, and

•         the person does not intend to take up residence in Australia.

Application to your situation

You have not been present in Australia for 183 days or more during the ruling period.

Therefore, you are not a resident 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.

Application to your situation

You are not a member on behalf of whom contributions are being made to 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 and domicile tests of residency and so are a resident of Australia for domestic income tax purposes for the whole ruling period.

Question 2

Residency - Double Taxation Agreement

It is possible to be a resident for tax purposes of more than one country at the same time in respect of an income year or part of an income year. If this is the case, in determining your liability to pay tax in Australia it is necessary to consider any applicable double tax agreements. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the ITAA 1936 and the ITAA 1997 and provide that the provisions of a double tax agreement have the force of law.

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 (DTA).[1]

Article 4 of the Country A 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.

Article 4 states:

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

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

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

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

Permanent home

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 provides that in relation to a 'permanent home':

a.    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.

b.    any form of home may be considered, including a house or apartment belonging to or rented by the individual and a rented furnished room.

We have concluded that you had a permanent home in both Australia and Country A based on the following considerations:

•         You maintained your main residence in Australia. Your immediate family continued to live the main residence in Australia while you were absent in Country A and it was available for you to return to.

•         You entered into a long term lease in Country A for an apartment for a number of years. You physically lived in the apartment for the whole ruling period, furnished it with household effects and it was available to you at all times while you lived in Country A.

Personal and economic ties (centre of vital interests)

The OECD commentary states that 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 Pike v Federal Commissioner of Taxation [2019] FCA 2185 it was found that a taxpayer who had a spouse and children in Australia, and owned a non-income producing block of land and motor vehicles in Australia, had closer personal and economic ties as a whole to the foreign country by virtue of the income stream he derived from the employment he carried out in the foreign country where he spent most of the relevant period. It was this foreign sourced income which not only supported his life and lifestyle in the foreign country but also supported his family in Australia.

In your case, in Australia:

•         you have a spouse and children who live here

•         your assets include the family home, a car, bank accounts, household effects, superannuation and shares which do not produce assessable income

•         you do not receive any income from Australian sources.

In Country A:

•         you have no family or close personal ties

•         your assets include a bank account, basic household furniture and personal effects

•         you are employed on a permanent basis with a Country A based company

•         you derive the employment income that supports you and your family.

We have concluded that your personal and economic ties as a whole were closer to Country A for the relevant period due to the significance of the income stream you derived from your employment in Country A that supported the lifestyle of you and your family.

Conclusion

The tiebreaker tests in Article X of the Country A Agreement apply so that you are solely a resident of Country A for treaty purposes. The provisions of the Country A Agreement will therefore apply on the basis that you are a resident of Country A.

Question 3

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

Employment income is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Therefore, any employment income earned in Country A will be assessable in your Australian income tax return as you are considered to be an Australia resident for domestic taxation purposes unless an article of the Country A agreement applies to prevent it.

Article X - Income from employment

Article X of the Country A Agreement provides salary, wages and other similar renumeration derived by a resident of a Contracting State in respect in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State.

Article X of the Country A Agreement states remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that Contracting State.

Conclusion

In your case, you are deemed to be a Country A resident under Article X of the DTA.

Therefore, Article X of the DTA applies to make employment income you derive in Country A taxable solely in Country A.

[1] See also ATO ID 2003/1195.