Edited version of private advice

Authorisation Number: 1052183611343

Date of advice: 15 December 2023

Ruling

Subject: Income - residency and source of dividend

Question 1

Are you an Australian resident for tax purposes?

Answer 1

No.

Question 2

As a temporary resident, are you only subject to tax on your Australian sourced income?

Answer 2

Yes. If you do not derive income from employment or services performed overseas you are only subject to tax on Australian sourced income.

Question 3

Does a dividend paid by COMPANY A out of rental proceeds from property situated in COUNTRY A have a non-Australian source?

Answer 3

Yes.

Question 4

Does a dividend paid by COMPANY A out of proceeds from the disposal of a COUNTRY A property have a non-Australian source?

Answer 4

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

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You and your spouse transferred your former principal residence in COUNTRY A to your child from your spouse's previous marriage prior to leaving COUNTRY A to live in COUNTRY B for a period of time.

You and your spouse were granted temporary visas.

You and your spouse arrived in Australia and resided with your child for a period of less than 6 months.

You and your spouse shipped your personal belongings from your former principal residence in COUNTRY A to Australia.

You and your spouse left Australia and arrived back in COUNTRY A. You flew to COUNTRY C on the same day.

Your personal belongings are being stored in Australia as you have not yet acquired a residence in Australia and at this stage are not certain that you wish to do so.

You and your spouse have applied for Australian permanent residency visas which are yet to be approved.

You and your spouse are not Australian residents within the meaning of the Social Security Act 1991.

You and your spouse own residences in COUNTRY D and COUNTRY C which you intend to reside in for several months at a time.

You are the sole shareholder of COMPANY A.

COMPANY A is a tax resident of and incorporated in, COUNTRY E. COMPANY A has two COUNTRY E tax resident directors where its assets which comprise of two commercial properties are situated in COUNTRY A and derive rental income. COMPANY A is taxed in COUNTRY A on its rental income.

One of the commercial properties was rented to your spouse who operated a business. An offer to acquire the business and property arose before their arrival in Australia which was accepted. The property was disposed of and COMPANY A paid COUNTRY A tax on the capital gain.

While you originally intended that COMPANY A and the remaining property would be left to your legatees, your children do not wish to inherit the property. You have asked COUNTRY E directors of COMPANY A to explore options of potentially disposing of the property.

You are in receipt of various state and private COUNTRY A pension payments paid into your COUNTRY A bank account. You have not received any dividends from COMPANY A since your initial arrival in Australia. You are not in receipt of any other foreign income.

Relevant legislative provisions

Income Tax Assessment Act 1997 subdivision 768-900

Income Tax Assessment Act 1997 subdivision 768-910

Income Tax Assessment Act 1936 section 6(1)

Income Tax Assessment Act 1936 section 44

Reasons for decision

Question 1

Are you an Australian resident for tax purposes?

Summary

No.

Detailed reasoning

For tax purposes, you are a resident of Australia if you meet at least one of the following tests. You are not a resident of Australia if you do not meet any of the following tests:

•                     the resides test (otherwise known as the ordinary concepts test)

•                     the domicile test

•                     the 183 day test, or

•                     the Commonwealth superannuation fund test.

We have considered your circumstances, and conclude that you are not a resident of Australia as follows:

•                     You are not a resident of Australia according to the resides test.

•                     You do not meet the domicile test because your domicile is not in Australia.

•                     You do not meet the 183 day test because you were not in Australia for 183 days or more during the 20XX and 20XX income years.

•                     You do not fulfill the requirements of the Commonwealth Superannuation test.

More information

For more information about residency, see Taxation Ruling TR 2023/1 Income tax: residency tests for individuals.

Question 2

As a temporary resident are you only subject to tax on your Australian sourced income?

Summary

Yes. If you do not derive income from employment or services performed overseas you are only subject to tax on Australian sourced income.

Detailed reasoning

A temporary resident only declares income derived in Australia or any income earnt from employment or services performed overseas while you are a temporary resident of Australia.

You do not receive income in Australia and you do not derive employment or personal services income from COMPANY A or any other company. Therefore, you are only subject to tax on your Australian sourced income.

Question 3

Does a dividend paid by COMPANY A out of rental proceeds from property situated in COUNTRY A have a non-Australian source?

Question 4

Does a dividend paid by COMPANY A out of proceeds from the disposal of a COUNTRY A property have a non-Australian source?

Summary

Yes.

Detailed reasoning

Section 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936) provides that the assessable income of a resident shareholder includes dividends paid by a company (whether resident or not) out of profits derived by it from any source. If the shareholder is a non-resident, the shareholder's assessable income includes dividends paid by the company to the extent that they are paid out of profits derived from sources in Australia.

Apart from several specific items of income, there are no statutory guidelines for determining source. Whether the source of a dividend is foreign sourced is a question of fact as it has been left to the courts to determine the approach to be applied and the factors to be taken into account.

Nathan v FC of T (1918) 25 CLR 183 (Nathan) concerned the receipt of dividends by a resident shareholder of a company incorporated under English law, whose registered office and central management and control were in England. The dividends were paid in England and represented a share of the profits of that part of the company's business that was carried on in Australia. The High Court held that the dividends were derived from a source within Australia. The source of dividends is determined by the 'real source of production of the dividend', that is, the place where the company's actual operations which gave rise to the profits from which the dividend was paid is situated. This may not necessarily be the place where the company's head office is situated or the place where the declaration of the dividend occurred.

Nathan's case was considered by the High Court in Esquire Nominees Ltd v FC of T (1973) 73 ATC 4114 (Esquire) where the Court held that dividends declared by a Norfolk Island resident company in favour of the taxpayer, and which could be traced back to an Australian resident trading company, were derived by the taxpayer from sources in Norfolk Island. In considering the geographical location of the profits of the company, the Chief Justice said that it was a question of fact to be determined on all the facts and circumstances in each particular case and that there was no warrant for treating the profits of some other company as the source of the shareholders dividend. The Chief Justice concluded that, in the case of an investment company, the place where the company made its investment income was the place where it had its central management and control and that this was the geographical source of the profits.

In determining the source of a dividend, that is, the source of the profits from which the dividend is paid, attention must be directed to the particular company which pays the dividend.

Application to your situation

Here, COMPANY A is deriving rental income from property situated in COUNTRY A and from selling property also situated in COUNTRY A. COMPANY A's circumstances can be compared to Nathan in that the real source of production of the dividend that gives rise to the profits from which the dividend is paid from is COUNTRY A. COMPANY A can be compared to Esquire in considering the geographic source of the dividend. The fact that the property was held in COUNTRY A, the COUNTRY A rental income was declared in COUNTRY A and taxed by COUNTRY A, and the capital gain was also declared in COUNTRY A would point towards the geographic location of the source not being in Australia.

COMPANY A would have derived its profit from COUNTRY A and that is where the property and rental income is situated and therefore the dividends would have a non-Australian source.