Edited version of private advice

Authorisation Number: 1052195446021

Date of advice: 29 November 2023

Ruling

Subject: Residency

Question 1

Are you a resident of Australia for taxation purposes from your arrival in Country A until you return to Australia according to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Are you a resident of Australia for taxation purposes from your arrival in Country A until you return to Australia according to the tiebreaker provisions of the Agreement between the Government of the Commonwealth of Australia and the Government of Country A for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Agreement)?

Answer

No.

Question 3

Are regular salary payments you received from your employer while you reside in Country A taxable in Australia?

Answer

No.

Question 4

Are leave payments you received from your employer while you reside in Country A taxable in Australia?

Answer

Yes.

This ruling applies for the following periods:

Year ended 30 June 20xx

Year ending 30 June 20xx

The scheme commenced on:

1 July 20xx

Relevant facts and circumstances

You were born in Country B.

You are a citizen of Australia through naturalisation.

You have also retained your Country B and Country C citizenships.

Your spouse is a citizen of Australia through naturalisation.

She has also retained her citizenship of Country B.

Your children are citizens of Australia and Country B.

You are an academic professional at an Australian tertiary education institution on an ongoing permanent contract.

You are currently on paid research leave (sabbatical) from your Australian employer undertaking a research fellowship in Country A.

You departed Australia accompanied by your spouse and your children and arrived in Country A, where you will live for around twelve months.

For approximately the first three months after you arrived in Country A you continued to be paid your regular salary from your Australian employer.

Over this period of time, you were performing duties which relate to your substantive role as an academic professional such as research and supervision of research students.

You were then paid long service leave from your Australian employer.

For a short duration you received no payments from your Australian employer.

You also have used some annual leave at your full rate of salary.

For approximately a five month period of time you are being paid research (sabbatical) leave accrued under your Australian employer's research leave program.

Research leave accrues under the program at a rate of two months per year of academic service in a teaching and research role.

A tertiary education institution in Country A (the Foreign Institution) have sponsored a Country A employment pass and are hosting you for the duration of your sabbatical as a visiting research fellow.

The research fellowship at the Foreign Institution is a twelve-month contract; however, it has the ability to be extended.

The research fellowship contract contains no provisions for you to receive any type of payment, as such you do not receive any income from the Foreign Institution.

Your duties at the Foreign Institution include participating in seminars and collaborating with local staff, and the fellowship is independent to the duties of your substantive role for your Australian employer.

You are continuing to perform supervisory and research work remotely for your Australian employer throughout the duration of your time in Country A.

Australian tax has been withheld from all payments you have received from your Australian employer.

The national taxation authority of Country A considers you to be a tax resident of Country A for the duration of your time there.

Once you have lived in Country A with your spouse and your children for approximately twelve months you will conclude your residential fellowship and surrender your Country A employment pass.

Upon the conclusion of your sabbatical, you intend to return to Australia and resume your substantive position as an academic professional for your Australian Employer.

You have an apartment in Australia which you and your spouse own outright.

You have rented out your apartment to individuals who are not personal friends of you or your spouse.

You have executed a formal twelve-month contract for the rental of your apartment, with a signed tenant's agreement and bond posted to the relevant government agency.

Your only use of your apartment in Australia for the duration of the rental contract is the storage of your belongings in one of the bedrooms.

You intend to return to live in your apartment upon your return to Australia.

You have no plans to sell the apartment.

You, your spouse, and your children are living in your spouse's family's home in Country A for the duration of your time there.

Your spouse's relatives also live in the house you are staying in.

You, your spouse, and your children have your own rooms which are reserved exclusively for your use for the duration of your time in Country A, and you have permission to reside there indefinitely as you wish.

You and your spouse have your own ensuite, and your children's room shares a toilet with your spouse's relative's room.

You do not pay any rent to live in your spouse's family's house in Country A.

The house is listed as your designated residential address on your Country A Employment Pass and Dependent Passes, as well as your Country A bank accounts and credit cards.

You drive a car owned by your spouse's family's company which is reserved for your exclusive use for the duration of your time in Country A. You are permitted to drive on your Australian license for your first year in Country A.

You have Country A bank accounts and a Country A credit card.

Your children are attending an Australian International School in Country A.

You have no familial connections in Australia.

You and your spouse's extended family live in Country A and other countries.

You have an equivalent quantity of social connections in both Country A and Australia.

You maintain a formal membership with a religious organisation in Australia.

You are de facto members of a religious organisation in Country A.

You regularly attend a social activity organised by the religious organisation.

You also attend current affairs-related events outside of work and occasionally give community lectures.

Your spouse attends community groups and events in Country A.

You and your wife have informed the Australian Electoral Commission that you are overseas.

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.

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 as you meet the domicile test for Australian residency.

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 Income Tax Assessment Act 1936 (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 TR 2023/1 Income tax: residency tests for individuals.

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 are substantively employed by your Australian employer

•         Your own home remains in Australia

•         You will remain in Country A for approximately twelve months

•         You are engaged as a visiting research fellow at the Foreign Institution for the duration of your stay in Country A

•         You are living with your spouse and children in your spouse's family's house in rooms which are reserved exclusively for your use

•         You are renting out your Australian apartment on a twelve-month formal rental contract

•         You have no use of your Australian apartment besides the use of one room in which to store your belongings for the duration of the rental contract

•         You have opened bank accounts and obtained a credit card in Country A

•         Your children are attending school at the Australian International School in Country A

•         You have established regular habits and attend social and educational events in Country A

You are not a resident of Australia under the resides test for the duration you are living in Country A.

You may still be an Australian resident if you meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

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, you were born in the Country B and your domicile of origin is the Country B. You immigrated to Australia and became an Australian citizen.

It is considered that you abandoned your domicile of origin in the Country B and acquired a domicile of choice in Australia. You obtained citizenship in Australia and you intend to live here indefinitely. Therefore, your domicile is Australia.

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.

Paragraphs 74 & 77 of TR 2023/1 further illustrate the general requirements for a place of residence to be considered a permanent place of abode:

74. Generally, a departure from Australia with an intention to return to Australia after a finite period would not result in you having your permanent place of abode overseas. This is consistent with the legislative intent of the definition. However, if some time through the period overseas your intentions changed, all the factors would need to be reconsidered at that point to determine whether your permanent place of abode is overseas.

77. For practical purposes, it is convenient to set some 'rule of thumb' on what substantial means. Broadly, 2 years is considered to be a substantial period of time. What this means is that if your intended length of stay is less than 2 years, you are unlikely to be able to establish that your permanent place of abode is outside of Australia. Whether a stay of precisely 2 years or longer means you fall within the proviso will depend on the circumstances. The critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas.

Application to your situation

We have taken the following into consideration when deciding whether your permanent place of abode is outside Australia:

•         You have a fixed residential address in Country A which is your spouse's family's home

•         You are residing there with your spouse and children in rooms reserved exclusively for your use

•         Your own apartment remains in Australia

•         You have rented out your apartment in Australia for twelve months under a formal tenancy agreement

•         You intend to return to live in this apartment after the conclusion of your sabbatical

•         Your substantive employment role remains in Australia

•         You intend to resume this role after the conclusion of your sabbatical

It is considered that you have not definitely abandoned, in a permanent way, living in Australia.

Accordingly, 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 have not been present in Australia for 183 days or more during the 2023 income year and you will not be present in Australia for 183 days or more in the 2024 income year. Therefore, 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 satisfy the domicile test of residency; therefore, you are a resident of Australia for income tax purposes for the years ended 30 June 2023 and 30 June 2024.

Question 2

Summary

The tiebreaker tests of the Agreement deem you to be solely a resident of Country A for treaty purposes.

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 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 3(2) of the Agreement sets out the tiebreaker rules for residency for individuals. The tiebreaker rules 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 double tax agreement. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes.

3(2) Where by reason of the provisions of paragraph 1 of this Article an individual is both a Country A resident and an Australian resident-

(a) he shall be treated solely as a Country A resident:

(i) if he has a permanent home available to him in Country A and has not a permanent home available to him in Australia;

(ii) if sub-paragraph (a)(i) of this paragraph is not applicable but he has an habitual abode in Country A and has not an habitual abode in Australia;

(iii) if neither sub-paragraph (a)(i) nor sub-paragraph (a)(ii) of this paragraph is applicable but the Contracting State with which his personal and economic relations are closest is Country A;

(b) he shall be treated solely as an Australian resident-

(i) if he has a permanent home available to him in Australia and has not a permanent home available to him in Country A;

(ii) if sub-paragraph (b)(i) of this paragraph is not applicable but he has an habitual abode in Australia and has not an habitual abode in Country A;

(iii) if neither sub-paragraph (b)(i) nor sub-paragraph (b)(ii) of this paragraph is applicable but the Contracting State with which his personal and economic relations are closest is Australia.

Permanent home

Permanent home is not defined in the Double Tax Agreement. Therefore, recourse can be made to supplementary materials in order to aid construction. The OECD commentary to the Model Tax Convention provides that in relation to a 'permanent home':

a.    for a home to be permanent, an individual must have arranged and retained it for his or her 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. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (e.g. travel for pleasure, business travel, attending a course 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 possession of the house and the possibility to stay there.

b.    any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

We have concluded that you have a permanent home in Country A and do not have a permanent home in Australia based on the following considerations:

•         You are living in your spouse's family's home in Country A

•         You, your spouse, and your children have your own rooms which are reserved exclusively for your use for the duration of your time in Country A, and you have permission to reside there indefinitely as you wish.

•         You are renting out the apartment you own in Australia under a formal tenancy contract for twelve months.

•         You have surrendered the right to reside in your apartment for the duration it is being rented out.

Conclusion

As your permanent home is in Country A, the tiebreaker tests in Article 3(2) of the Agreement apply so that you are deemed to be a resident only of Country A for treaty purposes. The provisions of the Agreement will therefore apply on the basis that you are a resident of Country A for taxation purposes.

Question 3

Summary

You were performing your work duties from Country A as a resident of Country A for taxation purposes, therefore the source of your regular salary payments over the relevant period is Country A. These payments are accordingly not taxable in Australia.

Detailed reasoning

As you are a resident of Country A for treaty purposes, the relevant provisions of the Agreement will apply to determine the allocation of taxing rights over your assessable income between Australia and Country A as outlined below.

Article 16 of the Agreement applies where a person is a resident of both Country A and Australia for the purposes of domestic law. In your case, it reads as follows:

Where such a person is treated for the purposes of this Agreement solely as a resident of Country A, he shall be exempt in Australia from tax on any income in respect of which he is subject to tax in Country A if the income is derived-

(a) from sources in Country A; or

(b) from sources outside both Contracting States.

With respect to income from employment, Article 16 of the Agreement must be read in conjunction with Article 11 of the Agreement, which deals with the source of income derived from personal services, which includes income from employment. Article 11(1) states:

1. Subject to this Article and to Articles 12, 13 and 14 remuneration or other income derived by an individual who is a resident of one of the Contracting States in respect of personal (including professional) services shall be subject to tax only in that Contracting State unless the services are performed or exercised in the other Contracting State. If the services are so performed or exercised such remuneration or other income as is derived therefrom shall be deemed to have a source in, and may be taxed in, that other Contracting State.

As such, any income received while in Country A will not be taxable in Australia if the income is held to have a source in Country A. However, income which is derived from employment exercised in Australia will be deemed to have an Australian source and may also be taxed in Australia.

The Commissioner's view on where employment is exercised accords with the guidance found on page 305 of the commentary on the OECD's Model Convention with Respect to Taxes on Income and Capital, which provides the following:

Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid. One consequence of this would be that a resident of a Contracting State who derived remuneration, in respect of an employment, from sources in the other State could not be taxed in that other State in respect of that remuneration merely because the results of this work were exploited in that other State.

Application to your circumstances

As you were physically present in Country A while being paid your regular salary to perform your normal work duties for your Australian employer for some of the time you are living in Country A, we consider that the work was exercised in Country A, therefore incomed earned from work performed over this period will be taxable only in Country A and be deemed to have a source in Country A. As such, this income is exempt from tax in Australia under Article 16 of the Agreement.

Australia does not have a taxing right over this income; therefore, it should not be included in your tax return for that income year.

A credit for any Australian tax paid will not be available to you in Country A for these amounts as the taxation of these amounts by Australia is not in accordance with the Agreement.

Question 4

Summary

Leave payments you used in Country A were accrued during your employment exercised in Australia, therefore this income is Australian sourced and is taxable in Australia. You may be able to obtain a credit in Country A for Australian tax paid on these amounts.

Detailed reasoning

In contrast to salary payments, pages 305-306 of the Commentary on the OECD's Convention with Respect to Taxes on Income and Capital explain that leave payments and other accruing benefits are derived from the State in which the employment was exercised at the time of accrual, not from the state in which the taxpayer may be resident at the time they exercise benefits previously accrued:

The condition provided by the Article for taxation by the State of source is that the salaries, wages or other similar remuneration be derived from the exercise of employment in that State. This applies regardless of when that income may be paid to, credited to or otherwise definitively acquired by the employee.

A payment made with respect to unused holidays / sick days that accrued during the last year of employment is part of the remuneration for the period of work that generated the holiday or sick leave entitlement... Where it would be established, on the basis of the taxpayer's employment records, that these holidays and sick days clearly relate to specific periods of past employment and that the payment constitutes remuneration for these periods of employment.

Therefore, leave payments which have accrued during a period of employment in Australia retain their Australian source and may be taxed in Australia, despite the fact that they may be exercised during a period in which you are not a resident of Australia. As this income may also be taxed in Country A under Article 11 of the Agreement, tax relief may be sought under Article 18(5), which provides:

Subject to the provisions of the laws of Country A regarding the allowance as a credit against Country A tax of tax payable in any country other than Country A, Australian tax payable, whether directly or by deduction, in respect of income from sources within Australia shall be allowed as a credit against Country A tax payable in respect of that income.

Application to your circumstances

Your leave benefits have accrued over the course of exercising your employment duties in Australia as an academic professional at your employer's institution; therefore, leave payments you have received in Country A are Australian-sourced income. As such, these payments will be taxable in Australia under Article 11 of the Agreement. As you are a resident of Country A, these payments will also be taxable in Country A with a credit for Australian tax paid allowed in accordance with Article 18(5) of the Agreement.

[1] See also ATO ID 2003/1195.