Edited version of private advice

Authorisation Number: 1052028823649

Date of advice: 6 September 2022

Ruling

Subject: Residency - assessable income

Question 1

Are you a resident of Australia for taxation purposes under subsection 6(1) of the Income Tax Assessment Act 1936?

Answer

Yes.

Question 2

Are you a resident of Australia for taxation purposes under the Double Tax Agreement between Australia and Country Y?

Answer

Yes.

Question 3

Are you required to declare in your Australian tax return your employment income derived in relation to services performed in Country Y?

Answer

Yes.

Question 4

Are you entitled to a foreign income tax offset for taxes paid in Country Y?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born in Australia.

You are a citizen of Australia.

You are not a permanent resident of any other country.

You left Australia in August XXXX to work in Country Y.

Your spouse has accompanied you to Country Y.

You have a family home in Australia.

Your family home is being rented to a family member while you are in Country Y.

You are renting out your family home at less than market rent to your family member.

You do not have a written rental agreement with the family member but only a verbal agreement.

The agreement with the family member who is renting your family home is that you will return to the home to live when you return to Australia each year for a certain number of weeks holiday.

Your belongings are still in the family home in Australia; and your bedroom and ensuite are not used by the family member who is renting your family home.

You return to Australia for a certain number of weeks each year.

You are in Country Y for a certain number of months of each year.

You are employed by a company in Country Y with an on-going arrangement and no fixed term.

You have a temporary resident visa to enter Country Y.

You and your spouse intend to live and work in Country Y for the next X years prior to retirement.

You do not intend on working in Australia again.

You and your spouse intend to return to Australia for a certain number of weeks each year for recreational and social purposes.

Your spouse does not work in Country Y.

You are a resident of Country Y for taxation purposes.

You lodge joint tax returns in Country Y with your spouse. You split your income and your spouse declares part of your income in the tax return based on the rules in Country Y despite it's your employment income only.

You rent an apartment in Country Y which was initially a month-by-month rental agreement.

The apartment is currently on a 6-month lease; and is for your sole use in Country Y.

You took clothes to Country Y with you.

You have a bank account and household effects in Country Y.

You have your family home, bank accounts, financial investments, self-managed super fund, and a motor vehicle in Australia.

You are no longer a contributing member of the Commonwealth Superannuation Scheme (CSS), however you draw a pension from the CSS.

You are also receiving rental income from Australian sources.

You have family ties in Australia along with a network of friends.

You also have a network of friends in Country Y.

You and your spouse remain on the Australian electoral role.

You have not advised any Australian financial institutions that you and your spouse are foreign residents.

You suspended your Australian based health insurance policies upon leaving Australia.

When completing the Australian Immigration Outgoing Passenger Card, you and your spouse stated you're Australian residents departing temporarily for X plus months.

You and your spouse plan to return to Australia in 20XX for approximately XX weeks.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Subsection 6(1)

International Tax Agreements Act 1953

Reasons for decision

Question 1

Summary

You are a resident of Australia for taxation purposes under subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the period you are working in Country Y.

Detailed reasoning

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 (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:

You work in Country Y for a company in that country.

You work for X months in country Y each year.

You have a Country Y temporary resident visa which is valid until 20XX.

You return to Australia for XX weeks each year.

You own real estate (your family home); and you have bank accounts, financial investments, self-managed super fund and a motor vehicle in Australia.

You return to your family home in Australia which is readily available for your use.

You have left all of your belongings in your home in Australia while you are in Country Y.

You do not intend on being in Country Y on a permanent basis.

You remain on the Australian electoral roll.

You have family ties in Australia along with a network of friends in Australia.

You are residing in Australia according to ordinary concepts for the period you are working in Country Y.

Therefore, you are a resident under this test.

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 your domicile is Australia as you were born in Australia, and you are a citizen of Australia.

You have not taken any steps to change your domicile.

Therefore, you are a resident under this test.

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 do not intend on leaving Australia on a permanent basis.

You have only taken clothes with you to Country Y.

You will return to your family home in Australia for XX weeks of each year.

Your lease in Country Y for your accommodation was on a month-by-month basis only and has transitioned to a 6-month lease.

Your stay in Country Y is only for work purposes and you never abandoned your family home in Australia.

You maintained bank accounts, financial investments, self-managed super fund and your family home in Australia.

You remain on the Australian electoral roll.

You have family ties in Australia along with a network of friends in Australia.

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 were not in Australia for more than 183 days in the 20XX and 20XX income years.

You will not be in Australia for 183 days or more in the 20XX income year.

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 are a resident of Australia for taxation purposes for the period you are working in Country Y.

Question 2

Summary

You are a resident of Australia under the Double Tax Agreement between Australia and Country Y (DTA). You are not a resident of Country Y under the DTA.

Double Tax Agreement (DTA)

In determining liability to Australian tax on foreign sourced income, it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and the ITAA 1997 so that those Acts are read as one.

Section 5 of the Agreements Act states that, subject to the provisions of that Act, any provision in an Agreement listed in section 5 has the force of law.

Article X of the DTA between Australia and Country Y provides the meaning of the term 'resident of a Contracting State' for the purposes of determining the residency status of a person under the DTA. It also sets out the tiebreaker rules for residency for individuals to 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 DTA. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

If a person is a resident of both Australia and Country Y for domestic taxation purposes, it is necessary to consider the DTA and the tiebreaker rules where necessary.

ARTICLE X

Resident

1.    For the purposes of this Agreement, the term "resident of a Contracting State" means any person who:

(a)  in the case of Australia, is liable to tax as a resident of Australia; and

(b)  in the case of Country Y, is liable to tax therein by reason of the person's domicile, residence, place of management or any criterion of a similar nature.

The term "resident of a Contracting State" also includes a Contracting State and, in the case of Country Y, its States and any political subdivision or local authority thereof. 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 in Country Y.

You only intend on being in Country Y on a temporary basis to carry out your employment duties. It is not your intention to remain in Country Y.

Country Y is not your domicile, and you are only liable to tax in Country Y in respect of your employment income for services performed in Country Y.

Therefore, you are resident of Australia under the DTA. You are not a resident of Country Y under the DTA.

Question 3

Summary

Based on Article X of the DTA, Australia and Country Y both have the taxing right on the employment income you derived in relation to services performed in Country Y. Therefore, you are required to declare in your Australian tax return your employment income derived in relation to services performed in Country Y.

Detailed reasoning

Double Tax Agreement (DTA)

Article X

Income from Employment

1. Subject to the provisions of Articles A, B and C, salaries, wages and other similar remuneration derived by an individual who is a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by an individual who is a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first mentioned State if:

(a)  the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the fiscal year concerned; and

(b)  the remuneration is paid by, or on behalf of, an employer who is not a resident of that other State; and

(c)   the remuneration is not borne by a permanent establishment which the employer has in that other State.

Application to your circumstances

The employment income you derived in relation to services performed in Country Y will be taxable in Country Y. However, Australia is not prevented from taxing that income because you are a resident of Australia under the DTA.

Based on Article X of the DTA, Australia and Country Y both have the taxing right on the employment income you derived in relation to services performed in Country Y. Therefore, you are required to declare in your Australian tax return your employment income derived in relation to services performed in Country Y.

Question 4

Summary

Based on Article X of the DTA, the tax paid in Country Y in respect of your employment income for services performed in Country Y will be allowed as a credit against Australian tax payable in respect of that income.

Under the foreign income tax offset rules, you will be entitled to a tax offset for the income year in which your assessable income included an amount in respect of which you paid foreign income tax, even if you paid the foreign income tax in another income year.

Detailed reasoning

Double Tax Agreement (DTA)

ARTICLE 22

Methods of Elimination of Double Taxation

1.    Subject to the provisions of the laws of Australia which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle of this Article), Country Y tax paid under the laws of Country Y and in accordance with this Agreement, in respect of income derived by a resident of Australia shall be allowed as a credit against Australian tax payable in respect of that income.

Foreign income tax offset rules

The purpose of the foreign income tax offset rules in Division 770 of the ITAA 1997 is to protect a taxpayer from the double taxation that may arise where the taxpayer pays foreign tax on income that is also taxable in Australia.

Subsection 770-10(1) of the ITAA 1997 provides that you are entitled to a tax offset for an income year for foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all, or part of an amount included in your assessable income for the year.

The tax offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another income year.

Foreign income tax is a tax imposed by a law other than an Australian law, on income, profits, or gains - section 770-15 of the ITAA 1997.

A taxpayer is deemed to have paid the foreign income tax if the foreign tax has been withheld from the income at its source - section 770-130 of the ITAA 1997.

The offset amount you are entitled to will not always be the same amount of the tax paid overseas. If you are claiming more than $1,000, you will first need to work out your foreign income tax offset limit to determine your entitlement.

The general guidelines including the record keeping requirements are contained in the Guide to foreign income tax offset rules 20XX, ATO document QC 67996.

Convert foreign income to Australian dollars

You must convert all foreign income, deductions and tax offsets to Australian dollars in your tax return.

Depending on your circumstances and the type of income, you will need to use either the:

•         specific prevailing exchange rate

•         average exchange rate.

Reporting foreign income

Unlike Australia, most countries do not have an income year ending on 30 June. As such you may need to report your foreign income and any associated tax offsets in multiple tax returns in Australia.

You will need to work out which income years the income amounts align to and apportion them accordingly.

This information can be found by going to our web site at www.ato.gov.au and typing in the search field QC 31917. Link to Converting foreign income to Australian dollars is also found in this document.

Application to your circumstances

Based on Article X of the DTA, the tax paid in Country Y in respect of your employment income for services performed in Country Y will be allowed as a credit against Australian tax payable in respect of that income.

Under the foreign income tax offset rules, you will be entitled to a tax offset for the income year in which your assessable income included an amount in respect of which you paid foreign income tax, even if you paid the foreign income tax in another income year.

You need to convert your foreign income to Australian dollars, determine your tax offset entitlement and report your foreign income and associated tax offsets by working out which income years the income amounts align to and apportion them accordingly.