Edited version of private advice

Authorisation Number: 1052164031483

Date of advice: 22 November 2023

Ruling

Subject: Residency for taxation purposes and source of income

Question 1

Are you a resident of Australia for taxation purposes?

Answer

No.

Question 2

Is your employment income from Company A (an Australian entity) for work performed in Country B considered Australian-sourced income?

Answer

No.

This ruling applies for the following period:

Year ending 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

You were born in Country A.

You are a dual citizen of Country A and Australia.

You moved from Country A to Australia.

You became a permanent resident of Australia in 20XX and subsequently acquired Australian Citizenship.

You left Australia in 20XX permanently and moved to country B to commence a permanent role at Company B based in Country B.

Prior to relocating to Country B you resigned from your position with Company C.

You moved with your family to Country B; this included your spouse and children.

You first entered Country B with a 2-year employment visa, which has been renewed multiple times since moving there.

You terminated the lease of the property where you lived in Australia, sold your car, sold and/or donated your furniture and any remaining personal effects were shipped to the Country B.

You cancelled all memberships and subscriptions and notified the bank and other financial institutions in Australia of your non-resident status.

You cancelled your private health insurance and informed the Australian Electoral Office of your absence from Australia.

You advised Medicare to remove your name from their records.

You kept one bank account open in Australia for convenience and to pay ongoing professional expenses.

In Country B you entered into a renewable one-year lease for an apartment, which you continue to live in with your family.

You leased the apartment unfurnished and purchased items with your wife to fully furnish and set up the apartment.

You purchased a car and obtained a driver's licence in Country B and opened overseas bank accounts and credit cards.

Your salary is paid into the Country B bank account, and you live day to day out of that account.

You have obtained Private Health Insurance in Country B (provided by your employer annually).

You participate in various sporting activities in Country B including playing cricket and attending the Gym.

Your children are attending school in Country B.

You own cryptocurrency worth approximately $XXXX.

You do not have any other assets, property, or investments in Australia apart from a Superannuation fund which cannot be accessed until you turn 60.

You are required to lodge tax returns in Country A.

You are not required to lodge in Country B.

There is no double tax agreement between Australia and Country B.

After a period of several years you ceased your employment with Company B.

You then obtained employment with another company for a period of time.

You were subsequently offered an online job with Company A - an Australian entity, located in Australia, however you were to carry out your employment duties remotely from Country B.

You researched and sourced this employment from your home in Country B.

You contacted your potential future employer from Country B, attended meetings (virtually and via phone) from the UAE and negotiated the contract from your home in the UAE.

Your general duties under the employment agreement include:

•         Being responsible for the provision of professional services to clients of your employer located in Australia.

•         Ensure the accurate and prompt completion of records held by your employer

•         Attending meetings as required.to facilitate management.

•         Undergoing continuing professional education to ensure you are fully aware of the latest technical developments in relation to your role as required by Company A.

•         Ensuring that Company A complies with the relevant Australian national standards and accreditation requirements.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

Income Tax Assessment Act 1997section 6-5

Reasons for decision

Question 1

Are you a resident of Australia for taxation purposes?

Summary

You will not be a resident of Australia for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 for the financial year ended 30 June 20XX.

Detailed reasoning

Overview of the law

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 2023/1 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

We have considered each of the statutory tests listed above in relation to your particular facts and circumstances. We conclude that, for the period 1 July 20XX to 30 June 20XX 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 considered the following factors in forming our conclusion:

•         You are currently residing in Country B and have been since 20XX.

•         You have not made regular return visits to Australia.

•         When you relocated to Country B it was your intention to leave Australia permanently.

•         When you left Australia, you cancelled your lease, sold your car, sold/donated your furniture, and shipped your families remaining personal effects to your home in the Country B.

We also consider that although your domicile of origin is Country A, sometime after you relocated and became a citizen of Australia your domicile of choice became Australia. However, 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 in 20XX permanently and moved to Country B.

•         You first entered the Country B with a 2-year employment visa - which has been renewed multiple times since moving there.

•         In Country B you entered into a renewable one-year lease for an apartment, which you continue to live in with your family.

•         You leased the apartment unfurnished and purchased items with your wife to fully furnish and set up the apartment.

•         You do not have any other assets, property, or investments in Australia apart from a Superannuation fund which cannot be accessed until you turn 60.

•         When you relocated to the Country B in 20XX it was your intention to leave Australia and reside in Country B permanently.

You were not in Australia for 183 days or more during the 20XX income year.

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

Question 2

Is your employment income from Company A (an Australian entity) for work performed in the Country B considered Australian-sourced income?

Summary

In this case, we have determined that your employment income does not have an Australian source. However, this decision is based on the facts relating to your particular situation and cannot automatically be applied to other taxpayers who work remotely overseas for an Australian employer. Each situation must be considered on a case-by-case basis by weighing up the importance of the various factors.

Detailed Reasoning

The relevant parts of section 6-5 of the ITAA 1997 state:

(1) Your assessable income includes income according to ordinary concepts, which is called ordinary income.

...

(3) If you are a foreign resident, your assessable income includes:

(a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

(b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

In Nathan v. Federal Commissioner of Taxation 25 CLR 183 at 189-190 it was recognised that the ascertainment of the actual source of a given income is a practical, hard matter of fact.

As stated by Bowen J in Federal Commissioner of Taxation v. Efstathakis (1979) 9 ATR 867; 79 ATC 4256 (the Efstathakis Case) at ATR 870; ATC 4259, to determine source:

... the answer is not to be found in the cases, but the weighing of the relative importance of the various factors which the cases have shown to be relevant.

In the Cam, French and Efstathakis cases it was held that the source of the income was where the taxpayer performed the services:

Commissioner of Taxation v Cam & Sons Ltd (1936) 36 SR (NSW) 544 (the Cam Case) - concerned wages paid to seamen employed to work on trawlers. They were engaged and paid in New South Wales, but most of their services were provided outside state territorial waters. Jordan CJ, with whom Street and Bavin JJ agreed in the Cam Case at 548, held that:

Where income is derived from wages or salary, again the source has several factors. Personal exertion may be involved in negotiating and obtaining the contract of employment, in performing the stipulated services, and obtaining payment for them.... [I]n the ordinary case of the employment of a seaman... where there is nothing special, either in the circumstances of the contract of employment or in the payment, and where the work is both done and paid for in the ordinary course, the all-important factor is the doing of the work; and the contract of employment and the payment are relatively insignificant and formal elements. But this is not necessarily the case with respect to all wages or salary. In the case of an appointment to a sinecure, the engagement and the payment may be the only significant factors

Accordingly, the wages had to be apportioned based on 'working time in and out of New South Wales territorial waters.

In Federal Commissioner of Taxation v French (1957) 98 CLR 398 (the French Case) - the taxpayer was employed as an engineer by the Australian company CSR which carried on business in New South Wales and, relevantly, New Zealand. Each year, the taxpayer spent two or three weeks in New Zealand as inspecting engineer for the company in its New Zealand business. At all other times, the taxpayer performed services for the company in New South Wales. A majority of the High Court held that the wages paid in respect of the period in New Zealand were sourced in New Zealand, because this is where the services were performed, this being the most important factor in Mr French's situation (see French Case at 411, 417 and 422).

However, the Court also made comments to the effect that this decision did not necessarily determine what would be most important in every personal services contract. For example, Dixon CJ at 405 in relation to a director and at 406 in relation to an accountant procured to achieve a specified result, and Kitto J at 417-418 refers to a situation where remuneration was payable regardless of service, and to a person who worked sometimes overseas who was paid while on sick leave, and to where a period of overseas service might in substance be merely incidental to Australian service.,

In the Efstathakis Case - the taxpayer was a Greek National resident in Australia who was employed by the Greek Government as a secretary/typist in the Greek embassy. She had applied for the job in Greece, and the post had been gazetted there. She performed the services in Australia. Her net pay was compiled in Greece, a cheque was drawn on a bank in Greece and then received in Australia. A condition of her employment was that she could be posted anywhere in the world, but she would probably have resigned, as she had put down roots in Sydney, having child there, buying a unit, and marrying a naturalised Greek Australian.

Bowen CJ, with whom Brennan and Deane JJ agreed, held that the wages paid to the taxpayer had an Australian source. His Honour considered the above factors, but gave most weight to 'the residence of the taxpayer in Australia and the facts that the services were performed and payment received [in Australia]. The payment of remuneration depended upon actual performance of the services (the Efstatakis Case at ATR 871; ATC at 4260).

Notwithstanding the above, the outcome may be different in cases where special skills or creative talents are being rendered (Federal Commissioner of Taxation v. Mitchum (1965) 113 CLR 401; (1965) 13 ATD 497; (1965) 9 AITR 559) (the Mitchum case). In such cases, factors such as the place of negotiation and execution of the contract may be relatively more important. When considering the earlier French case, the High Court stated at 408-409, that:

Taylor J., as I read his reasons, was engaged in deciding a question of fact deriving what assistance he could from the decided cases. He said, speaking, of course, of a case of wages or salary for work done or services performed - ". . . if, as the statute requires, I am compelled to select as the source of an employee's remuneration either the locus of the contract of service, or, the place where the remuneration is payable thereunder, or, the place where the services are performed which give rise to the right of remuneration I am content to conclude that, in the absence of special circumstances, this third element should be chosen" (1957) 98 CLR, at p 422

In so saying, his Honour was not, in my opinion, laying down a rule of law: he was expressing his reasons for the conclusion of fact to which he had come. I do not feel compelled or persuaded by the decision of the Court in French's Case (1957) 98 CLR 398 to hold that in every case where work forms the consideration for wages or salary paid, the source of the income constituted by the wages or salary is in the place where the work is done.

... It is sufficient for present purposes to say that neither French's Case (1957) 98 CLR 398 nor any other of which I am aware lays it down that for the purposes of the Act the source of wages, salary or remuneration for services performed is necessarily, in default of special circumstances, in the place where the work is done or the services performed.

From the above cases, source cases concerning the provision of personal services are decided by weighing up the outcomes of the consideration of the following three factors (with the weighting given to each determined by their relevance to the case):

•         the place where the contract of employment is entered into,

•         the place where remuneration is payable, and

•         the place where the services are performed.

Application to your circumstances

In your case, you are employed by an entity located in Australia, and your conditions of employment specify that you are being paid to provide professional services remotely from Country B.

Your contract of employment was formulated, prepared, and is governed by the laws that apply in Australia. However, prior to being offered the position, you had been living in Country B for some years and you sourced the employment from your home in Country B. The contract was also executed by you whilst you were living in Country B. Therefore, this factor leans overall towards the source of the income being in Country B.

Your remuneration is paid by an entity which is located in Australia. However, your remuneration is being paid into a Country B bank account whilst you are living in Country B. As such, the place where the remuneration is payable is Country B. Therefore, this factor leans overall towards the source of the income being in Country B.

In the Cam, French and Efstathakis cases, it was held that the source of the income of the respective employees was where the taxpayer performed the services.However in those cases the place where the taxpayer was located was the same as where the taxpayer did the work, where it was given effect to and where the outcome of the work occurred:

•         the Cam Case - the fishermen undertook fishing activities putting nets into the water and fished obtaining fish from the sea which all occurred where the boat on which he was working on at the time was located,

•         the French Case - the professional services the taxpayer provided in undertaking inspections were in relation to things he inspected in the locations that he was in at the time he conducted the inspections and which he subsequently reported on, and

•         the Efstathakis Case - the taxpayer undertook secretarial duties and typing work. Her work was given effect to and the outcome of the work occurred in the location she worked at.

However, your case can be slightly distinguished from these cases, as the place where your work is given effect to and where the outcome of the work occurs is with your employer in Australia.

Notwithstanding this, on the physical location of where your duties are performed alone, this leans towards the source of the income being Country B. In addition, you had left Australia some years prior to the contract being entered into in Country B, and you have not been back to Australia to complete any training or perform any of the work.

As such, despite Australia being the place your work is given effect to and where the outcome of the work occurs, the other factors listed above outweigh this.

Therefore, the income you earn from Company A has a foreign source and will not be included in your assessable income.

It is noted that this decision is based on the facts relating to your particular situation and cannot automatically be applied to other taxpayers who work remotely overseas for an Australian employer. Each situation must be considered on a case-by-case basis by weighing up the importance of the various factors.