Edited version of private advice

Authorisation Number: 1052276805548

Date of advice: 14 August 2024

Ruling

Subject: Residency and double tax agreements

Question 1

Are you a resident of Australia for tax purposes as defined by subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 2

Are you entitled to a Foreign Income Tax Offset (FITO) for tax paid on the employment income you derived in Country B in the 20XX income year?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

Your country of origin is Australia.

You are a citizen of Australia.

On DD MM 20XX, you commenced employment with your employer in Australia.

On DD MM 20XX, you and your family left Australia to live in Country B for an 18-month period.

You and your family stayed at a property you owned in Australia for XX years prior to your departure to Country B. Once your property located in Australia was sold you stayed with a relative for a brief period until you departed.

In 20XX you sold the property in Australia with the intention to use those funds for the purchase of another property in Australia upon your return from Country B.

You and your family retained your Australian household items and placed them in your relative's storage shed while you were located in Country B.

You owned motor vehicles in Australia which were sold prior to your departure with the intention of purchasing new vehicles upon your return.

You made no notification to your Australian health system or your health insurance provider to remove yourself and your families details from their records as you had scheduled medical appointments with specialists you wanted to retain whilst residing in Country B. You did, however, inform your private health insurer to suspend (not cease) your insurance for the durance of your time in Country B and upon your return to Australia have since recommenced your insurance.

Prior to your move to Country B, you encountered severe shortages of rental properties and strict regulations on rental durations. Under the financial advice you were given you purchased a home to ensure a stable accommodation during your temporary stay in Country B. The property purchase was not an intention to establish permanent residency in Country B but rather to provide you and your family with a temporary living arrangement that suited your needs during your stay abroad.

You purchased a property in Country B prior to departing Australia.

The move to Country B was never intended to be permanent. The purpose of the overseas visit was for a change of scenery to provide you and your family to a new experience. You had no intention to remain in Country B for an extended period or to settle there permanently. Your intention was to return to Australia in less than two years which you have done.

You maintained your employment with the full support of your Australian employer during the period you were in Country B and frequently returned to Australia for work-related events. Your employer's support was based on the understanding that your employment status would remain unchanged, and you would continue to fulfill your role from Country B, and again from Australia upon your return.

You held a bank account in Country B to allow you to transfer your income from Australia to Country B.

You and your children returned to Australia over several periods for both work and medical reasons.

Since returning to Australia, you have purchased a home, where you currently reside and retained your household items that were previously in storage.

You lodged a tax return in Country B as a non-resident.

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.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 770-10

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

International Tax Agreements Act 1953

Reasons for decision

Question 1

Are you a resident of Australia for tax purposes as defined by subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Summary

You satisfy the resides test and domicile test of residency and are a resident of Australia for income tax purposes for the income year ended 30 June 20XX.

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... 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 resides test is about 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. The ordinary meaning of reside does not require an individual to have a principle or usual place of residence in Australia.

Application to your situation

You are a resident of Australia under the resides test for the period DD MM 20XX to DD MM 20XX based on the following:

•         you were physically present in Australia for a long period

•         intention or purpose

o   Your intention was to stay in Country B for a short period with your family for 18 months and was never meant to be permanent.

o   The purpose of the overseas visit was to give you and your family a change of scenery and a new experience.

o   You intended to return Australia after your overseas visit.

o   You had an agreement with your Australian employer to continue working for them while you were residing in Country B.

•         behaviour

o   You owned a property Australia prior to your departure to Country B.

o   You sold your Australian property prior to your departure to Country B.

o   You bought a property in Country B upon your arrival as advised by your accountant as it was too hard to obtain a rental property for you and your family's circumstances.

o   You purchased in Australia upon your return.

•         family or employment ties

o   Your spouse and children are in Australia.

o   You have been employed by an Australian company since DD MM 20XX.

•         maintenance and location of assets

o   You owned a property in Australia prior to departing overseas.

o   You own a new property in Australia since returning.

•         social and living arrangements

o   You and your family hold strong social and sporting connections in Australia.

You are an Australian tax resident under the resides test. Although the law only requires you to be considered a resident under one test, for completeness the other tests are also considered.

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 Australia and your domicile of origin is Australia.

It is considered that you did not abandon your domicile of origin in Australia and acquired a domicile of choice in Australia. You were not entitled to reside in Country B indefinitely while living in Country B.

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:

•         the intended and actual length of the taxpayer's stay in the overseas country

•         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

•         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

•         whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence

•         the duration and continuity of the taxpayer's presence in the overseas country

•         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.

Application to your situation

The Commissioner is not satisfied that your permanent place of abode is outside Australia because your intention to reside in Country B was not on a permanent basis:

•         You made several trips back to Australia both for work and family during your time you were residing in Country B

•         Your long-term employment is in Australia

•         You did not abandon in a permanent way, living in 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:

a)            the person's usual place of abode is outside Australia, and

b)            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 20XX 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 resides test and domicile test of residency and are a resident of Australia for income tax purposes for the income year ended 30 June 20XX.

Question 2

Are you entitled to a Foreign Income Tax Offset (FITO) for tax paid on the employment income you derived in Country B in the 20XX income year?

Summary

You are entitled to claim a FITO for the Country B tax paid as the income derived is included in your income under Australia's domestic income tax law and you paid tax on this income in Country B.

Detailed reasoning

As a tax resident of Australia, you are subject to tax on your income derived from Australian and foreign sources.

Article XX of the double tax agreement between Australia and Country B provides that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in Country B. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in Country B.

Consequently, remuneration derived from the employment you carried out in Country B during the year ended 30 June 20XX is subject to tax in both Australia and Country B.

To prevent the double taxation of foreign sourced income that has been taxed in another country, resident taxpayers are entitled to a non-refundable tax offset for foreign income tax paid on an amount included in their assessable income.

In your case, Article XX of the double tax agreement between Australia and Country B provides that where you are required to pay tax in Country B, you will be entitled to a credit against tax paid in Australia.

A FITO is a non-refundable tax offset and will reduce the Australian tax that is payable on the foreign income which has already been subjected to foreign income tax.

Under section 770-10 of the ITAA 1997, to qualify for an offset, you must have paid foreign income tax on an amount that is included in your Australian assessable income for that year.

As your income earned in Country B is assessable to you in Australia, the tax you paid on this income is used to calculate your allowable foreign income tax offset in Australia.

The offset is based on the total foreign income tax paid, however, it is limited to the total amount of Australian income tax that would have been payable on the relevant income. If claiming an offset of $1,000 or less, you only need to record the actual amount of foreign income tax paid on your assessable income (up to $1,000).

When claiming a FITO of more than $1,000 you need to calculate your foreign income tax offset limit. To make this calculation you need to work out the income tax payable by you (including Medicare) for the financial year, disregarding any other tax offsets you may be entitled to. To make this calculation you will need to include any deductions related to your income to which you are entitled.

For further information and assistance, please refer to the Guide to foreign income tax offset rules available on our website www.ato.gov.au.

You can only claim an offset up to the amount of your calculated cap. Any excess offset cannot be carried forward to a later income year.