Edited version of private advice

Authorisation Number: 1051993566990

Date of advice: 17 June 2022

Ruling

Subject: Residency for tax purposes

Question 1

Will Individual X and Individual Y be residents of Australia for taxation purposes from the commencement date of Individual X's employment position?

Answer

No.

Question 2

Will Individual X be a resident of Country X for the purposes of Article 4(X) of the double tax agreement with Country X (Country X Agreement) from the commencement date of the employment position?

Answer

No.

Question 3

Will Individual Y be a resident of Country X for the purposes of Article 4(X) of the Country X Agreement from the commencement date of Individual X's employment position?

Answer

Yes.

Question 4

If Individual X is a resident of Country X under Article 4(X) of the Country X Agreement, does Article 19(1)(b) prevent Australia taxing the base salary and allowances payable under the employment contract?

Answer

Not applicable.

Question 5

Will any income actually or beneficially derived by Individual X, Individual Y or Company X from sources outside Australia from the investments held by them be subject to tax in Australia?

Answer

No.

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

Individual X was born in Australia and is an Australian citizen.

Individual X has lived and worked overseas for many years and has lived in rented accommodation with Individual Y in Country X for some years.

Individual X and Individual Y have been non-residents of Australia for many years up to and including the current income year.

Individual X became a permanent resident of Country X around one year ago after holding successive residence permits that allowed them to reside in Country X for work purposes.

Individual Y was born in Country X.

Individual Y holds an Australian permanent resident visa.

Individual X and Individual Y are tax residents of Country X under Country X domestic law.

Individual X's employment income was subject to income tax in Country X.

Foreign individuals living in Country X may be subject to an exemption from income tax on foreign income provided certain conditions are met.

Individual X is taking up an employment position with an Australian government department in Country X.

Individual X will travel on an Australian Diplomatic Passport and be subject to the Vienna Convention on Diplomatic Relations.

During the period Individual X and Individual Y have been living in Country X they have returned to Australia on various occasions.

Individual X and Individual Y have bank accounts in both Country X and Australia.

Individual X owns a furnished apartment in Australia where Individual X and Individual Y stay in when they visit Australia.

Individual X also owns two other apartments in Australia.

Individual X and Individual Y do not own any real property in Country X.

Individual X and Individual Y hold a portfolio of foreign investments in a foreign registered company they control (Company X).

Company X is not a resident of Australia for taxation purposes.

Neither Individual X or Individual Y are members of a superannuation scheme established by deed under the Superannuation Act 1990 or eligible employees for the purposes of the Superannuation Act 1976.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 6-10

Income Tax Assessment Act 1997 section 995-1

International Tax Agreements Act 1953

Reasons for decision

Question 1

Residency - 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 Individual X and Individual Y meet the resides test:

Individual X and Individual Y have been foreign residents for many years and are not relocating to Australia in conjunction with Individual X taking up the employment position.

Individual X and Individual Y are not residents of Australia under the resides test for the relevant period.

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

Individual X and Individual Y may 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).

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

Individual X

Individual X was born in Australia and their domicile of origin is Australia. They have lived outside Australia for many years and were granted permanent residency of Country X around one year ago.

It is considered that Individual X has not abandoned their domicile of origin in Australia and acquired a domicile of choice in Country X. They were not entitled to reside in Country X indefinitely until they were granted permanent residency around one year ago and there is currently insufficient evidence to say that they will abandon their Australian domicile during the period of the new employment position.

Therefore, the domicile of Individual X is still Australia.

Individual Y

Individual Y was born in Country X.

Therefore, the domicile of Individual Y is Country X, and Individual Y is not a resident of Australia under the domicile test.

Permanent place of abode - Individual X

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:

Individual X has been a foreign resident for many years and is not relocating to Australia in conjunction with taking up the employment position.

The Commissioner is satisfied that the permanent place of abode of Individual X is outside Australia.

Therefore, Individual X is not 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

Individual X and Individual Y will not be present in Australia for 183 days or more during the relevant income years.

Therefore, Individual X and Individual Y will not be residents 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

Individual X and Individual Y are not members 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, Individual X and Individual Y will not be residents under this test.

Conclusion

As Individual X and Individual Y will not satisfy any of the four tests of residency, they are not residents of Australia for income tax purposes for the relevant years.

Questions 2 and 3

In determining liability to pay tax in Australia it is also necessary to consider any applicable double tax agreement. 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.

Where a person is a resident of both Australia and another country under the domestic tax law of each country it will be necessary to determine residency for the purposes of the relevant double tax agreement. 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 agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

However, to consider the tiebreaker rules, a person must be a 'resident' of each contracting state as specified in the relevant double tax agreement. Broadly, a person is a 'resident of a contracting state' if they are fully liable to tax in that country. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.

Article 4(X) of the Country X Agreement states:

•         For the purpose of this Agreement, the term "resident", in relation to a Contracting State, means a person who is fully liable to tax therein by reason of being a resident of that State under the tax law of that State.

•         A person is not a resident of a Contracting State for the purposes of this Agreement if the person is liable to tax in that State in respect only of income from sources in that State.

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 a double tax agreement.

In relation to Article 4(X) of the Country X Agreement and the term 'resident of a contracting state', the OECD Commentary explains the following:

8. Paragraph 1 provides a definition of the expression "resident of a Contracting State" for the purposes of the Convention. The definition refers to the concept of residence adopted in the domestic laws (see Preliminary remarks). As criteria for the taxation as a resident the definition mentions: domicile, residence, place of management or any other criterion of a similar nature. As far as individuals are concerned, the definition aims at covering the various forms of personal attachment to a State which, in the domestic taxation laws, form the basis of a comprehensive taxation (full liability to tax). It also covers cases where a person is deemed, according to the taxation laws of a State, to be a resident of that State and on account thereof is fully liable to tax therein (e.g. diplomats or other persons in government service).

8.11 Paragraph 1 refers to persons who are "liable to tax" in a Contracting State under its laws by reason of various criteria. In many States, a person is considered liable to comprehensive taxation even if the Contracting State does not in fact impose tax. For example, charities and other organisations may be exempted from tax, but they are exempt only if they meet all of the requirements for exemption specified in the tax laws. They are, thus, subject to the tax laws of a Contracting State. Furthermore, if they do not meet the standards specified, they are also required to pay tax. Most States would view such entities as residents for purposes of the Convention....

In this case, it is considered that both Individual X and Individual Y will be residents of Country X for the purposes of Article 4(X) of the XXXX agreement during the term of Individual X's employment position, subject to the exception discussed below. This is because they are domestic tax law residents of Country X and are liable to full taxation on that basis. Although they are eligible for an exemption from tax on foreign income, this is only available if certain criteria are met, so the availability of an exemption does not disqualify them from being residents of Country X for the purposes of Article 4(X).

In relation to the exception in Article 4(X) of the XXXX Agreement, the OECD Commentary explains the following:

8.1 In accordance with the provisions of the second sentence of paragraph 1, however, a person is not to be considered a "resident of a Contracting State" in the sense of the Convention if, although not domiciled in that State, he is considered to be a resident according to the domestic laws but is subject only to a taxation limited to the income from sources in that State or to capital situated in that State. That situation exists in some States in relation to individuals, e.g. in the case of foreign diplomatic and consular staff serving in their territory.

In regard to Individual X's employment position and liability to tax in Country X, Article 34 of the Vienna Convention on Diplomatic Relations states the following:

A diplomatic agent shall be exempt from all dues and taxes, personal or real, national, regional or municipal, except:

(a) indirect taxes of a kind which are normally incorporated in the price of goods or services;

(b) dues and taxes on private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for the purposes of the mission;

(c) estate, succession or inheritance duties levied by the receiving State, subject to the provisions of paragraph 4 of Article 39;

(d) dues and taxes on private income having its source in the receiving State and capital taxes on investments made in commercial undertakings in the receiving State;

(e) charges levied for specific services rendered;

(f) registration, court or record fees, mortgage dues and stamp duty, with respect to immovable property, subject to the provisions of Article 23.

From the above, Individual X will be exempt from all taxes in Country X except, broadly, taxes on private immovable property, private income having its source in Country X, and capital taxes on investments made in commercial undertakings in Country X.

Therefore, Individual X will not be a resident of Country X for the purposes of Article 4(X) of the Country X Agreement as they will be liable to tax in Country X in respect only of income from sources in Country X as specified in the exception in Article 4(X).

Question 4

Article 19 of the Country X Agreement concerns 'Government service' and states, relevantly:

1. (a) Remuneration, other than a pension, paid by a Contracting State or a political subdivision or local authority of that State to an individual in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in that Contracting State.

(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the individual is a resident of that other State who:

(i) is a citizen or national of that other State; or

(ii) did not become a resident of that other State solely for the purpose of rendering the services.

As mentioned above, Individual X will not be a resident of Country X under Article 4(X) of the Country X Agreement.

Therefore, Article 19(1)(b) will not apply and Article 19(1)(a) will instead apply to give Australia sole taxing rights over the employment income derived by Individual X from the employment position.

Consequently, as Individual X will be a non-resident under Australian domestic law, non-resident rates of tax will apply to their employment income.

Question 5

The assessable income of a foreign resident includes ordinary income and statutory income derived directly or indirectly from all Australian sources during the income year (sections 6-5 and 6-10 of the ITAA 1997).

As Individual X, Individual Y or Company X are not residents of Australia for taxation purposes, any income derived by them from sources outside Australia will not be assessable in Australia.