Edited version of private advice

Authorisation Number: 1052191727792

Date of advice: 16 November 2023

Ruling

Subject: Residency - double tax agreement

Question

Is the taxpayer deemed to be a resident solely of Australia for the purpose of the Double Tax Agreement (DTA) between Australia and Country Y (Country Y DTA)?

Answer

Yes.

This ruling applies for the following period:

Year Ended 30 June 20XX

Relevant facts and circumstances

Background

The taxpayer was born in Australia and has lived in Australia for most of his life. His domicile of origin is Australia by birth and he is an Australian citizen.

The taxpayer is married to an Australian citizen and has 2 adult children, both of whom have been living in Country Y.

In or around 20XY the taxpayer and his wife began investing in real estate in Country Y.

Days in and out of Australia

From 20AB to date, the taxpayer has predominantly divided his time between Country Y and Australia. When not in Australia or Country Y the taxpayer and his wife have been travelling to other countries for vacations.

For part of 2020 and 2022 and for all of 2021, the taxpayer was unable to leave Country Y due to Covid travel restrictions.

The taxpayer's wife's permanent residency

Several years after starting their investment in Country Y, the taxpayer's wife decided to obtain permanent residency in Country Y with the intention of obtaining citizenship there. She is not required to renounce her Australian citizenship to receive citizenship in Country Y.

When the taxpayer's wife was granted permanent residency in Country Y, she became eligible to apply for citizenship. The taxpayer's wife was later granted citizenship in Country Y. She does not have the intention of renouncing her Australian citizenship. She now intends to spend more time in Australia now that she has citizenship in Country Y.

In 20XX the taxpayer was also granted permanent residency in Country Y. The taxpayer had applied for permanent residency during the time of the Covid travel restrictions because of uncertainties relating to his temporary visa and his inability to leave Country Y.

Living arrangements in Australia

The taxpayer and his wife own a property in Queensland (Queensland home).

Up until around Month 20XZ, the Queensland home was where the taxpayer and his wife lived when in Australia. When the taxpayer travelled outside Australia, their Queensland home was always left vacant, fully furnished and made available for the taxpayer to live in. The Queensland home is currently listed for sale.

On DD Month 20XZ, the taxpayer and his wife acquired a Unit near their Queensland home and moved their personal belongings into this Unit (Queensland Unit).

The taxpayer and his wife now live in the Queensland Unit when they are in Australia. The Queensland Unit is always left vacant, fully furnished and available for the taxpayer to live in.

Taxpayer intention

When the taxpayer departed Australia in the 20XZ income year, he was departing temporarily and intended to maintain an Australia residence as his home. He intended to return to Australia to live in his home there as part of the regular order of his life. After each time he left Australia, the taxpayer intended to return to the Queensland Home or Queensland Unit as applicable (where he kept all his belongings and which was left vacant while he was overseas). He did not have any intention to cease residing in Queensland.

Investments and businesses in Australia

The taxpayer owns the following assets in Australia in his name:

a)    25% of the issued shares in an investment company;

b)    a 25% interest in a partnership that carries on a primary production business;

c)    25% of the issued shares in a contracting company which owns plant and equipment; and

d)    52% of the issued shares in a dormant company.

The taxpayer is the managing partner in the partnership and the managing director in the contracting company. The taxpayer is actively involved in the day-to-day decision making for both of these businesses. He continues to do so when he is staying in Country Y. The remaining interests in these businesses are owned by resident trust estates which are connected to the taxpayer.

The taxpayer is a director of the corporate trustees for particular resident trust estates that own Australian real estate and shares in Australian companies.

In addition, the taxpayer and his wife are members of an Australian self managed superannuation fund (SMSF).

The current total net value of assets owned by the taxpayer, his wife and associated entities, and located in Australia, is approximately AUD.

Investments and business in Country Y

The taxpayer does not own any assets in Country Y. He has indirect interests in entities based in Country Y and Australia that own properties in Country Y.

The taxpayer's wife is the sole shareholder of a company incorporated in Country Y which is an investment vehicle and owns a share portfolio managed by an asset management company based in Country Y.

The current total net value of assets owned by the taxpayer, his wife and associated entities, and located in Country Y, is approximately AUD.

Living arrangements in Country Y

In Country Y, the taxpayer and his wife stay in a house (their Country Y residence) that is owned by a company based in Country Y. The taxpayer and his wife are directors in this company.

The taxpayer and his wife do not have a written lease in relation to the Country Y residence. Their Country Y residence is always available and ready for their use when in Country Y.

Circumstances surrounding the taxpayer's stay in Australia

The taxpayer:

a)    maintains bank accounts and credit cards in Australia;

b)    earns 100% of income from his business and investment assets in Australia;

c)    maintains his private health insurance in Australia, which consists of two policies, one for when he is in Australia and the other for when the taxpayer is overseas;

d)    has a local doctor, dentist and optometrist in Australia;

e)    owns vehicles which are garaged in Australia;

f)     has a significant circle of friends in Australia and regularly catches up with these friends when in Australia; and

g)    returns to Australia at least 4 times per year.

All decisions relating to the SMSF including the employer contributions and pensions are made when the taxpayer and his wife are in Australia.

Circumstances surrounding the taxpayer's stay in Country Y

The taxpayer does not:

a)    work in Country Y (has no personal services income sourced in Country Y);

b)    maintain bank accounts and credit cards in Country Y;

c)    maintain health insurance in Country Y;

d)    have a local doctor, dentist or optometrist in Country Y;

e)    have a significant circle of friends in Country Y; and

f)     own vehicles in Country Y.

The taxpayer's share portfolios (including those of associated entities) are managed by professional portfolio managers based in Australia and Country Y.

Assumption

For the purposes of the Country Y DTA, the taxpayer is a resident of both Australia and Country Y under their respective domestic income tax laws.

Relevant legislative provisions

International Tax Agreements Act 1953 section 4

International Tax Agreements Act 1953 section 5

Income Tax Assessment Act 1936

Income Tax Assessment Act 1997

Reasons for decision

Summary

The taxpayer is deemed to be a resident solely of Australia under Article 4(3) of the Country Y DTA.

Detailed reasoning

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 DTA. Sections 4 and 5 of the International Tax Agreements Act 1953 (Agreements Act) incorporate that Act with the Income Tax Assessment Act 1936 and the Income Tax Assessment Act 1997 and provide that the provisions of a DTA have the force of law.

The Commissioner's view on interpreting DTAs, as set out in Taxation Ruling TR 2001/13 Income tax: Interpreting Australia's Double Tax Agreements, states at paragraphs 5 and 6:

As well as giving DTAs and the MLI^[[1]] the force of law, the Agreements Act clarifies the status of these agreements with respect to the 'Assessment Act'³ and the various Acts which impose Australian tax. The effect of subsection 4(1) of the Agreements Act, in particular, is that the DTAs are to be interpreted and read as one with the Assessment Act. While each DTA itself is a treaty, and only the other country party to it can take action on it internationally, the provisions of the DTAs become part of Australian domestic law by legislative action, and are just as legally effective in domestic law as the provisions of the Assessment Act. The provisions of a DTA can therefore be relied on, in their implemented form, by individual taxpayers before Australian courts.

Subsection 4(2) of the Agreements Act deals with possible conflicts by effectively providing that the terms of the DTAs override those of the Assessment Act (except for the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936) and Acts imposing Australian tax, in the event of any inconsistency.

Even if a DTA allocates tax residency to another country, a taxpayer may remain a resident of Australia for Australian tax purposes and will be taxed on that basis to the extent it is not inconsistent with the allocation rules in the DTA[2].

The Country Y DTA

The Agreements Act states that the Country Y DTA is set out in an Australian Treaty Series. The Agreements Act gives the Country Y DTA the force of law.

Article 4 of the Country Y DTA sets out the meaning for 'residence' and includes tie breaker rules for residents of both Contracting States.

The tie breaker rules under Article 4(3) ensure that an 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 tie breaker rules do not change a taxpayer's residency status for domestic law purposes.

Article 4 of the Country Y DTA

Article 4 reads as follows:

ARTICLE 4 Residence

1. Subject to paragraph (2), for the purposes of this Convention, a person is a resident of a Contracting State if that person is a resident of that State for the purposes of its tax. A Contracting State or any political subdivision or local authority thereof or any agency or instrumentality of any such State, subdivision or authority is also a resident of that State for the purposes of this Convention.

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

3. Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:

(a) he shall be deemed to be a resident solely of the Contracting State in which he has a permanent home available to him;

(b) if he has a permanent home available to him in both Contracting States, or if he does not have a permanent home available to him in either of them, he shall be deemed to be a resident solely of the Contracting State with which his personal and economic relations are the closer.

... (emphasis added)

Permanent home tie breaker

Paragraph (a) of Article 4(3) under the Country Y DTA gives preference to the Contracting State in which the individual has a permanent home available to them. The term 'permanent home' is not defined in the Country Y DTA. Therefore, recourse can be made to supplementary materials in order to aid construction on the meaning of a 'permanent home'.

The commentary to the OECD Model Tax Convention on Income and on Capital (2017) (OECD Commentary) relevantly states (at paragraphs 12 and 13):

Subparagraph a) means, therefore, that in the application of the Convention (that is, where there is a conflict between the laws of the two States) it is considered that the residence is that place where the individual owns or possesses a home; this home must be permanent, that is to say, the individual must have arranged and retained it for his permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration.

As regards the concept of home, it should be observed that any form of home may be taken into account (house or apartment belonging to or rented by the individual, rented furnished room). But the permanence of the home is essential; this means that the individual has arranged to have the dwelling available to him at all times continuously, and not occasionally for the purpose of a stay which, owing to the reasons for it, is necessarily of short duration (travel for pleasure, business travel, educational travel, attending a course at a school, etc.). For instance, a house owned by an individual cannot be considered to be available to that individual during a period when the house has been rented out and effectively handed over to an unrelated party so that the individual no longer has the possession of the house and the possibility to stay there.

During the year ended 30 June 20XZ the taxpayer owned a home in Australia (the Queensland home initially, followed by the Queensland Unit), arranged and retained for his (and his wife's) permanent use.

Whilst the taxpayer didn't personally own a home in Country Y during that period, he nevertheless possessed the Country Y residence given it was available to him (and his wife) at all times on a continuous basis (as opposed to occasionally), such that it too constituted a permanent home available to him.

As the taxpayer satisfies the permanent home test in both Australia and Country Y the tie breaker under paragraph (b) of Article 4(3) of the Country Y DTA must be considered to determine his residency under the Country Y DTA.

Personal and economic relations tie breaker

Where an individual has a permanent home in both Contracting States, paragraph (b) of Article 4(3) under the Country Y DTA gives preference to the State with which the personal and economic relations of the individual are closer, this being understood as the centre of vital interests.

In this regard, the OECD Commentary states (at paragraph 15):

... Thus, regard will be had to his family and social relations, his occupations, his political, cultural or other activities, his place of business, the place from which he administers his property, etc. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State.

Examining the taxpayer's circumstances as a whole, we have concluded that his personal and economic relations were closer to Australia than to Country Y in respect of the year ended 30 June 20XZ. The reasons for this include:

•         the taxpayer's business interests are more significant in Australia than Country Y (for example, he is actively involved in his Australian businesses), and the taxpayer only earns income from personal services in Australia;

•         the taxpayer owns significant assets in Australia personally and none in Country Y; and the net value of assets held by him, his wife and associated entities is approximately double the net value of those held in Country Y;

•         the taxpayer has absolute control over the use and availability of his Australia home, while he has no formal right to occupy the Country Y residence;

•         the taxpayer's social connections (other than his adult daughters) are greater in Australia;

•         the taxpayer's intention is to continue his association with Australia and to spend more time in Australia;

•         all of his bank accounts and credit cards are maintained by the taxpayer in Australia; and

•         the taxpayer only maintains health insurance and other health care needs, such as his doctor, dentist and optometrist in Australia.

Therefore, the taxpayer is deemed to be a resident solely of Australia pursuant to paragraph (b) of Article 4(3) of the Country Y DTA.

[1] Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting done at Paris on 7 June 2017.

[2] TR 2023/1 Income tax: residency tests for individuals, at [108].