Edited version of private advice

Authorisation Number: 1052050236938

Date of advice: 30 November 2022

Ruling

Subject: Residency and income tax

Question 1

Is the income, derived from salary and wages received from your Australian employer, whilst on sabbatical in COUNTRY Y, assessable in Australia, for the period XXXX to XXXX?

Answer

Yes.

Question 2

Is your income, as an employee, derived from employment with XXXX and exercised in Australia, assessable in Australia, from XXXX to XXXX?

Answer

Yes.

Question 3

Is your income, as an external contractor, derived from your contract with XXXX and exercised in Australia, assessable in Australia, from XXXX?

Answer

Yes.

Question 4

Is the income, derived from your rental property in Australia, assessable in Australia from XXXX until XXXX?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

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 COUNTRY X to Australian parents and hold both a COUNTRY X and Australian citizenship, since birth. You moved from COUNTRY X to Australia when you were 1 year old.

On XXXX, you travelled on a sabbatical from your employer, to visit family in COUNTRY Y. You entered COUNTRY Y on a XXXX Visa, allowing you to carry out employment-related work for XXXX while living in COUNTRY Y for one year.

You shipped most of your furniture and personal effects to COUNTRY Y, while keeping some of your items in a storage unit in Australia.

You returned to Australia briefly at the end of the sabbatical in COUNTRY Y, staying for several weeks while applying for your XXXX Visa.

On XXXX, you left Australia and entered COUNTRY Y on a XXXX Visa. You have no specific plans to return to Australia (apart from work commitments and holidays)

When you left Australia on XXXX, you shipped most of your furniture and personal effects to COUNTRY Y.

Your spouse and children are all dual Australian- COUNTRY Y citizens and are residing with you in COUNTRY Y. Your wife is currently employed in COUNTRY Y.

You are residing at XXXX (The Property), which you purchased in XXXX. You currently have a mortgage with a bank in COUNTRY Y for this property.

Until you purchased the property, you lived in private rental accommodation at:

•         XXXX to XXXX: XXXX

•         XXXX to XXXX: XXXX

•         XXXX to XXXX: XXXX

From XXXX until XXXX, you owned a house in Australia, which was your family home prior to moving to COUNTRY Y. You rented this property to tenants from XXXX until the lease finished on XXXX. In XXXX you sold the property in Australia and bought The Property in COUNTRY Y, which became and continues to be your family home.

As of XXXX you became a permanent resident of COUNTRY Y.

In your business, you currently carry out contract work for XXXX that requires you to visit Australia. These stays have previously been for between XXXX to XXXX weeks. You will most likely be returning to Australia in future years.

A majority of work for XXXX is completed within COUNTRY Y. This typically averages to a half-time workload over a two-year cycle, with roughly only XXXX to XXXX weeks of work performed in Australia over that period.

For work performed fin Australia, you are paid in AUD. All work performed for clients in COUNTRY Y is paid in XXXX.

You were previously an employee of XXXX on a series of contracts from XXXX to XXXX, with the most recent contract running from XXXX to XXXX. You then commenced work as an external consultant on XXXX

In Australia, you carry out the work for XXXX based in Australia. You do not have a permanent office there, rather you use their facilities when doing work for them. You use your own computer and other equipment. However, your work relies on use of the facilities, and you made use of office space and IT systems while working there.

When returning to Australia for work you normally stay with friends and family.

You have bank accounts in COUNTRY Y for personal banking, savings and your mortgage. You also have a business account in COUNTRY Y for managing your business.

You also have a bank account in Australia to manage your income and business costs while working on contracts for Australian organisations and for use when you visit Australia for work.

You have a superannuation account which contributions were made while you an employee of XXXX. You continue to make contributions to this fund through your business.

You hold both a COUNTRY Y and Australian drivers license.

When you left Australia, you informed both the Australian Electoral Commission and Medicare that you were departing.

You advised your private health insurance provider to cancel your policy on your departure from Australia.

You are not a member of the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS)

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

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

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Subsection 6-15(1)

Reasons for decision

In order to determine how your income sources are to be tax, firstly we need to address your residency status for the various periods.

For tax purposes, whether you are a resident of Australia is defined by subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

The definition has four tests to determine your residency for income tax purposes. These tests are:

•         the resides test

•         the domicile test

•         the 183 day test, and

•         the Commonwealth superannuation fund test.

It is sufficient for you to be a resident under one of these tests to be a resident for tax purposes.

Our interpretation of the law in respect of residency is set out in Draft Taxation Ruling TR 2022/D2 Income tax: residency tests for individuals.

The resides test

The resides test is the primary test of tax residency for an individual. If you reside in Australia according to the ordinary meaning of the word resides, you are considered an Australian resident for tax purposes.

Some of the factors that can be used to determine whether you reside in Australia include:

•         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.

No single factor is decisive, and the weight given to each factor depends on your specific circumstances.

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

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

Whether your domicile is Australia is determined by the Domicile Act 1982 and the common law rules on domicile. For example, you may have a domicile by origin (where you were born) or by choice (where you have changed your home with the intent of making it permanent).

Whether your permanent place of abode is outside Australia is a question of fact to be determined in light of all the facts and circumstances of each case. Key considerations in determining whether you have your permanent place of abode outside Australia are:

•         whether you have definitely abandoned, in a permanent way, living in Australia

•         length of overseas stay

•         nature of accommodation, and

•         durability of association

The 183-day test

Under the 183 day test, if you are present in Australia for 183 days or more during the income year, you will be a resident, unless the Commissioner is satisfied that both:

•         your usual place of abode is outside Australia, and

•         you do not intend to take up residence in Australia.

The question of usual place of abode is a question of fact and generally means the abode customarily or commonly used by you when are physically in a country.

The Commonwealth 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 circumstances

For period XXXX to XXXX

We have considered each of the statutory tests listed above in relation to your particular facts and circumstances. We conclude that, for the period XXXX to XXXX, you are a resident of Australia for taxation purposes.

Taking into account your individual circumstances, we have concluded that you are a resident of Australia according to ordinary concepts.

We also consider that your domicile was in Australia and the Commissioner was not satisfied that your permanent place of abode is outside Australia. We considered the following factors in forming our conclusion:

•         On XXXX you travelled on a sabbatical from your employer, to visit family in COUNTRY Y. You entered COUNTRY Y on a XXXX Visa, allowing you to carry out employment-related work for your Australian employer.

•         Your intentions at this time were not to leave Australia permanently and you were only given a leave of absence from your employer, for a period of XXXX.

•         When staying within COUNTRY Y, you did not have a usual place of abode and were staying in private rental accommodation.

•         Medicare and Private Health Insurance were still in place in Australia during this time.

•         You still had personal belonging in storage within Australia

You were not in Australia for 183 days or more for the relevant financial years between XXXX and XXXX.

You did not fulfil the requirements of the Commonwealth Superannuation test and are therefore not a resident under this test.

From XXXX

We have considered each of the statutory tests listed above in relation to your particular facts and circumstances. We conclude that, from XXXX, you are not a resident of Australia as follows.

Taking into account your individual circumstances, we have concluded that you are not a resident of Australia according to ordinary concepts.

We also consider that your domicile was in Australia, until XXXX when you became a permanent resident of COUNTRY Y. The Commissioner is satisfied that your permanent place of abode is outside Australia. We considered the following factors in forming our conclusion:

•         You left Australia and entered COUNTRY Y on a XXXX Visa on XXXX.

•         When you left Australia on XXXX, you shipped the remainder of your furniture and personal effects to COUNTRY Y

•         You have no specific plans to return to Australia (apart from work commitments and holidays)

•         In XXXX you purchased your own residence in COUNTRY Y. You currently have a mortgage with a bank in COUNTRY Y for this property.

•         Your spouse and children are all dual Australian- COUNTRY Y citizens and are residing with you in COUNTRY Y. Your wife is currently also employed in COUNTRY Y

•         As of XXXX you became a permanent resident of COUNTRY Y

You were not in Australia for 183 days or more during the relevant income years, from XXXX.

You do not fulfil the requirements of the Commonwealth Superannuation test and are therefore not a resident under this test.

Question 1

Most tax treaties have a provision of residency rules/tie-breaker tests forresolving the conflict of dual residency. Article 4 of the tax treaties lay Residency Tie Breaker Rules for the residency test.

Under Australian law, you are an Australian resident for taxation purposes from XXXX until XXXX (when your intentions were to depart Australia permanently), However, the taxation authority in COUNTRY Y, also consider you to be a resident from XXXX.

If the taxpayer is determined to be a dual resident, then you need to apply the residency tiebreaker test in the relevant country's double tax agreement.

Double Tax 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.[1]

Article XXXX of the XXXX Agreement sets out the tiebreaker rules for residency for individuals. who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:

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

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

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.

Application to your situation

Based on Article XXXX of the XXXX Agreement, you did not at the time that you travelled to COUNTRY Y on sabbatical on XXXX, have a permanent home in either contracting state.

From XXXX until XXXX, you owned a house which was your family home prior to moving to COUNTRY Y, however this property was rented on your departure and became your non-permanent home during that time.

At the time of arriving in COUNTRY Y on XXXX, you were staying in private rental accommodation, so also did not have a permanent home in COUNTRY Y, for the same period.

As you did not have a permanent home available to you in either States, you shall be deemed to be a resident only of the State with which your personal and economic relations are closer.

At the time of your sabbatical, you were still an employee of XXXX. You were being paid in AUD and contributions were still being made to your Australian Superannuation Fund.

You entered COUNTRY Y on a Business Visitor Visa, allowing you to carry out employment-related work for your Australian employer.

At this time, although your residence was unavailable to you, as it was being rented, your personal belongings remained within Australia.

When applying Article XXXX(XXXX) to your situation, your personal and economic ties are closer to Australia, so therefore you would be considered a resident of Australia for the period XXXX to XXXX, Therefore, you will be assessable under subsection 6-5(3) of the ITAA 1997 on the salary and wages received from your Australian employer,

Question 2

Income as employee

Subsection 6-5(3) of the ITAA 1997 provides that ordinary income derived by a non-resident directly or indirectly from Australian sources, as well as other ordinary income included by a provision on a basis other than having an Australian source, is assessable.

The salary and wages received by you are ordinary income for the purposes of subsection 6-5(3) of the ITAA 1997.

In determining liability to tax on Australian sourced income received by a non-resident, 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 the Agreements Act with the ITAA 1997 so that the two Acts are read as one.

Schedule XXXX of the Agreements Act contains the double tax convention between Australia and COUNTRY Y, the COUNTRY Y Convention. The COUNTRY Y Convention operates to avoid the double taxation of income received by Australian and COUNTRY Y residents.

Article XXXX of the COUNTRY Y Convention outlines the treatment of income from employment. Article XXXX(XXXX) of the COUNTRY Y Convention provides that salary and wages derived by a resident of COUNTRY Y shall be taxable only in COUNTRY Y unless the employment is exercised in Australia. If the employment is exercised in Australia, then the income may also be taxed in Australia.

Article XXXX(XXXX) of the COUNTRY Y Convention provides that the income will be exempt from tax in Australia if:

•         the taxpayer is present in Australia for a period or periods not exceeding in the aggregate 183 days in the Australian year of income, and

•         the remuneration is paid by or on behalf of an employer who is not a resident of Australia, and

•         the remuneration is not deductible in determining the profits of a permanent establishment or a fixed base which the employer has in Australia.

You were present in Australia for a period not exceeding 183 days. Your salary and wages were paid by an Australian resident employer and the exemption under Article XXXX(XXXX) of the COUNTRY Y Convention will, therefore, not apply.

Accordingly, as per Article XXXX(XXXX) of the COUNTRY Y Convention, you will be assessable under subsection 6-5(3) of the ITAA 1997 on the salary and wages received from your Australian employer, for services that are exercised within Australia, for the period XXXX to XXXX. You will therefore be required to apportion your income to the extent that it relates to services exercised within Australia and report these amounts in your Australian income tax return.

Question 3

Income as Business Enterprise

You are the owner of a freelance consulting business based in the COUNTRY Y and you derive business income from the business both within COUNTRY Y and in Australia. As such, the business profits article of the double tax agreement between Australia and COUNTRY Y is relevant.

Article XXXX of the COUNTRY Y Convention outlines the treatment of income from business. Article XXXX(XXXX) of the COUNTRY Y Convention provides that the profits of an enterprise of COUNTRY Y shall be taxable in the COUNTRY Y unless the enterprise carries on business in Australia through a permanent establishment situated in Australia. If the enterprise carries on business in that manner, the profits of the enterprise may be taxed in Australia but only so much of them as is attributable to that permanent establishment.

For the purposes of this Convention, Article XXX(XXXX) defines the term "permanent establishment" to mean a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Article XXXX(XXXX) defines the term "permanent establishment" to include especially:

a)    a place of management;

b)    a branch;

c)    an office;

d)    a factory;

e)    a workshop;

f)     a mine, an oil or gas well, a quarry or any other place relating to the exploration for or exploitation of natural resources; and

g)    an agricultural, pastoral or forestry property

Subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) defines 'permanent establishment' to be, at its most basic level, 'a place at or through which the person carries on any business'.

Taxation Ruling TR 2002/5 Income Tax: Permanent Establishment - What is 'a place at or through which [a] person carries on any business' in the definition of permanent establishment in subsection 6(1) of the Income Tax Assessment Act 1936? (TR 2002/5) provides guidance on the above definition. Paragraphs 25 to 35 explain that:

•         PE has its essence in the concept of permanence, in the sense of not being transitory or temporary. The phrase links the business to a particular place for a particular period

•         The definition of PE in subsection 6(1) should be construed in a way that is broadly consistent with the meaning of PE in our tax treaties. Interpreting the phrase to include the concept of permanence in both its geographical and temporal senses facilitates such an approach

•         Each situation needs to be judged in the context of the particular business and is a question of fact and degree

•         A place at or through which a person carries on a business must be geographically permanent. Any area, viewed commercially and as a whole, may, in relation to the business concerned, be a place. Examples include business premises such as a factory, office, farm, mine or market

•         While concepts such as ownership, rights to use and the length of time such rights exist are factors to consider in confirming geographic and temporal permanence, the lack of such ownership and other rights does not preclude the finding that a place exists

•         While the control of a site might indicate a place exists in relation to the person exercising control, the lack of control by a person of an area does not mean that that area is not a place for the purposes of the definition of PE in relation to that person

•         A place at or through which a person carries on a business must have temporal permanence, i.e. the business presence must not be of a purely temporary nature. The business must operate at that place for a period of time.

In Thiel v FC of T (1990) 90 ATC 4717, the High Court judges accepted that the OECD Model Taxation Convention's official Commentaries may be relevant to the interpretation of DTAs based on the OECD Model (Taxation Ruling TR 2001/13, paragraph 102).

Paragraph 6 of the OECD Model Tax Convention on Income and on Capital (2017 version) (the OECD Commentary) explains that the definition of PE in Article 5 contains the following conditions:

1. the existence of a 'place of business', i.e. a facility such as premises or, in certain instances, machinery or equipment;
2. this place of business must be 'fixed', i.e. it must be established at a distinct place with a certain degree of permanence;
3. the carrying on of the business of the enterprise through this fixed place of business. This means usually that persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the State in which the fixed place is situated.

The commentary to the OECD Model Convention indicates, the term " place of business " covers any premises, facilities or installations used for carrying on the business of the enterprise (whether owned or rented or otherwise at the disposal of the enterprise and whether situated in the business premises of another enterprise)

First condition - existence of a place of business

Paragraphs 10 to 12 of the OECD Commentary explain that there may be a place of business in the situation where an entity merely has a certain amount of space at their disposal. It is also immaterial whether the premises or facilities are owned or rented by or are otherwise at the disposal of the enterprise. Further, the place of business may be situated in the business facilities of another enterprise. This may be the case, for instance, where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise.

Paragraph 17 provides an example of - 'a painter who, for two years, spends three days a week in the large office building of its main client. In that case, the presence of the painter in that office building where he is performing the most important functions of his business (i.e. painting) constitute a permanent establishment of that painter.'

In your case, while you carried on your business activities primarily within COUNTRY Y, you also carry out activities in Australia. Whilst you do not have a permanent office there, you do use their facilities when doing work for them. As such, your place of business was split between COUNTRY Y and the business facilities of another enterprise (in this case XXXX).

Therefore, it is evident that a place of business existed at each workplace for you to carry on your business activities.

Second condition - place of business must be fixed

Established at a distinct place

Paragraphs 21 to 25 of the OECD Commentary explain that:

•         There must be a link between the place of business and a specific geographical point

•         Where the nature of the business activities carried on by an enterprise is such that these activities are moved between different locations, there may be difficulties in determining whether there is a single 'place of business'. However, for example, if two places of business are occupied and the other requirements are met, the enterprise may have two permanent establishments. A single place of business will generally be considered to exist where, in light of the nature of the business, a particular location within which the activities are moved may be identified as constituting a coherent whole commercially and geographically with respect to that business

•         A mine, for example, constitutes a single place of business even though business activities may move from one location to another at the mine site as it constitutes a single geographical and commercial unit in respect of the mining business

•         Where there is no commercial coherence, the fact that activities may be carried on within a limited geographic area should not result in that area being considered as a single place of business

•         An area where activities are carried on as part of a single project which constitutes a coherent commercial whole may lack the necessary geographic coherence to be considered as a single place of business. For example, where a consultant works at different branches in separate locations pursuant to a single project for training the employees of a bank, each branch should be considered separately. However, if the consultant moves from one office to another within the same branch location, he should be considered to remain in the same place of business. The single branch location possesses geographical coherence which is absent where the consultant moves between branches in different locations.

In your case, while you carried on your business activities primarily in COUNTRY Y, you also carried out activities in Australia. Therefore, it is evident that you carried out your activities from multiple places of business.

Consequently, each workplace needs to be looked at separately to determine whether you had a permanent establishment at one or more of those workplaces.

A certain degree of permanence

Paragraphs 28 to 32 of the OECD Commentary explain that:

•         Since the place of business must be fixed, it also follows that a permanent establishment can be deemed to exist only if the place of business has a certain degree of permanency, i.e. if it is not of a purely temporary nature. However, this can be difficult to determine

•         A permanent establishment may exist where the activities are of a recurrent nature; in such cases, each period of time during which the place is used needs to be considered in combination with the number of times during which that place is used (which may extend over a number of years). For example, the time requirement may be met due to the recurring nature of an activity regardless of the fact that any continuous presence lasts less than six months

•         Where a particular place of business is used for only very short periods of time, but such usage takes place regularly over long periods of time, the place of business should not be considered to be of a purely temporary nature.

Whether temporal permanence exists is a matter of fact and degree. However, as a guide, if a business operates at or through a place continuously for six months or more that place will be temporally permanent.

Because each case is a question of fact and degree the six month guide is not a hard and fast rule. The circumstances may for example indicate that a period of less than six months is sufficient to lead to the conclusion that temporal permanence exists. Where the period in Australia is less than six months there may still be temporal permanence where the connection with Australia is very strong.

Application to your circumstances

In your case, you were contracted to work at XXXX, for several years. Although your contract only required you to work a limited number of weeks every XXXX years, you intend to return to Australia to work in the coming years.

Having an amount of space, such as an office at your disposal, which is used for business activities, is sufficient to constitute a place of business even though located in premises owned by another enterprise.

The article requires that the place of business must be 'fixed' which is to say that it must be established at a distinct place with a certain degree of permanence.

Taxation Ruling TR 2002/5 examines the concept of permanence in the context of geographic permanence and temporal permanence. An office is a place which has geographic permanence.

The second criterion to be met in order for a place through which an enterprise carries on business to come within the definition of a permanent establishment is temporal permanence.

In this regard the judgement of Sheppard J in Applegate v. FCT 78 ATC 4054; (1978) 8 ATR 372 is relevant. In that case when discussing the meaning of 'permanent' in the phrase 'permanent place of abode' his honour said at p 4060 and p 378:

... permanent is used in the sense of something which is to be contrasted with that which is temporary or transitory. It does not mean everlasting. The question is thus one of fact and degree.

The commentary on Article 5 in the 2010 OECD Model Tax Convention on Income and on Capital discusses what represents permanence and states:

6.1 ... where a particular place of business is used for only very short periods of time but such usage takes place regularly over long periods of time, the place of business should not be considered to be of a purely temporary nature. (emphasis added)

In your situation, it is considered that your place of business in Australia had a sufficient degree of permanence, as although you only used it for short periods of time, the usage took place with a sufficient degree of regularity over a long period of time. Consequently, the place of business is not considered to be of a purely temporary nature, and you meet this condition.

Accordingly, as per Article XXXX(XXXX) of the COUNTRY Y Convention, you will be assessable under subsection 6-5(3) of the ITAA 1997 on the income received from XXXX, for services that are exercised within Australia. You will therefore be required to apportion your income to the extent that it relates to services exercised within Australia and report these amounts in your Australian income tax return.

Question 4

Income from real property

Article XXXX of the COUNTRY Y Convention outlines the treatment of income from real property. Article XXXX(XXXX) of the COUNTRY Y Convention provides that the Income derived by a resident of a Contracting State from real property may be taxed in the Contracting State in which the real property is situated.

Application to your circumstances

You were the owner of a residential rental property in Australia which was your family home prior to moving to COUNTRY Y. You rented this property to tenants following your departure from Australia until ultimately the property was sold in XXXX.

Accordingly, as per Article XXXX(XXXX) of the COUNTRY Y Convention, as your rental property is situated within Australia, you will be assessable under subsection 6-5(3) of the ITAA 1997 on the income derived from your rental property in Australia.

[1] See also ATO ID 2003/1195.