Edited version of private advice

Authorisation Number: 1052323482308

Date of advice: 2 January 2025

Ruling

Subject: Residency

Question 1

Are you Australian residents for tax purpose pursuant to subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936) for the 20XX income year?

Answer 1

No.

Question 2

Does Article 15, concerning Dependent Personal Service, of the Convention between Australia and Country A for the Avoidance of Double Taxation with respect to Taxes on Income (the Convention) apply to the income you derived from employment exercised in Country A?

Answer 2

Yes.

From the information provided, it is accepted that the employment was exercised in Country A, so the remuneration in respect of an employment exercised in Country A for the purposes of applying the Convention will be taxed in that state.

Question 3

Is the income you derived from employment exercised in Country A exempt from taxation in Australia under subsection 6-20(2) of the Income tax Assessment Act 1997 (ITAA 1997)?

Answer 3

Yes.

Where income is not subject to tax in Australia by virtue of the provisions of a double tax agreement Australia has with another country, it is exempt income under subsection 6 -20(2) of the ITAA 1936, expressly.

As Taxpayer 2 derived income in respect of employment exercised in Country A, the income is taxable only in Country A under Article 15 of the Convention. The Convention is given the force of law in Australia by the International Tax Agreements Act 1953 which is incorporated with the Income Tax Assessment Act 1936 and the ITAA 1997 so that those Acts are read as one.

Paragraph 106 of Taxation Ruling TR 2002/9 confirms that income that is not taxable in Australia by virtue of one of Australia's double tax agreements/conventions covered by the International Tax Agreements Act 1953 is exempt income under subsection 6-20(2) of the ITAA 1997.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You were both born in Country A and are citizens of Country A.

Taxpayer 1 is an Australian permanent resident from XX/XX/20XX.

Taxpayer 2 is an Australian permanent resident from XX/XX/20XX.

Taxpayer 2 is a resident of Country A for tax purpose.

You have XXX children, XXX and XXX who are Australian citizens.

Since XX/XX/20XX, Taxpayer 1 has been working full-time employment as the Manager for XXXX Pty Ltd Australia (The Company). An overseas work placement to Country A was initiated as a business strategy to seek market observation. Taxpayer 1 was chosen because it would be easier for them to learn about the social environment, demography, and employment habits.

The Company is a tax resident of Australia with the head office in City A.

On XX/XX/20XX, the family departed Australia for Country 1. As citizens Taxpayer 1 and Taxpayer 2 are allowed to stay in Country 1 permanently.

The Company treats Taxpayer 1 as a full-time employee working in Australia, without any salary adjustments as a result of the relocation. No changes to superannuation, sick-leave, or annual leave entitlements and the salary is paid into Taxpayer 1's Australian bank account.

This employment is the only reason the family is overseas, there is no intention to move to Country A permanently.

Your purpose of this overseas trip was Taxpayer's 1 work placement.

The Company reviews the work contract on an annual basis and there is no commitment beyond 20XX.

The children are enrolled in Country A's schools.

Prior to departure, the family lived at Address A.

The mortgage is still being paid for their Address A and the other XXX owned property Address B.

Taxpayer 1 owns the third property in XXXX Country A bought in 20XX, a family car and a bank account are the assets in Country A.

Both the Australian properties are being rented out and you intend to move back into the Address A property once you return to Australia.

Your other assets in Australia include bank accounts, credit cards and XXXXX superannuation accounts.

Taxpayer 2 still receives dividends from shares in Australia.

In the 20XX income year, the family was in XXXXXX for 366 days due mainly to the children's schooling requirements.

It is anticipated that that you will return to Australia at the end of the current placement is completed on 30 June 20XX.

You currently do not have return tickets to Australia.

You have not returned to Australia due to Taxpayer 2 and one of the children's passports' expiring within six months. Country A does not allow entry or exit if the passport is less than six months until it expires.

You have paused the family health insurance with XXXX.

Only Taxpayer 2 has lodged the Country A tax return.

The social connections you have in Australia has been continued with Australian family members visiting you in Country A.

The family lived in Country A in such a manner that you resided in Australia:

•                     Taxpayer's 1 routine is still as if they are still in Australia including following the XXXX public holidays.

•                     The children have maintained their connection with their Australian Educators and friends.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

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

International Tax Agreements Act 1953

Reasons for decision

Question 1

Section 995-1 of the Income Tax Assessment Act 1997(ITAA 1997) defines an Australian resident for tax purpose 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

•                     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 the ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests, (183-day test and the Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in the Taxation Ruling TR 2023/1 Income tax: residency tests for individuals.

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

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 not a resident of Australia under the resides test for the period XX/XX/20XX to XX/XX/20XXbased on the following:

Physical presence

•                     From XX/XX/20XX to XX/XX/20XX, you were physically in Country A.

Intention

•                     For the 20XX income year, your intention is to live and work in XXXXX due to Taxpayers 's 1 work opportunity and being the main income source for the family.

•                     The family will move back to Australia at the end of the Contract estimated as XX/XX/20XX.

Behaviour

•                     Your stated purpose to go to Country A was for Taxpayer's 1 full time employment while the work contract is valid.

•                     Your children are enrolled in Country A schools.

•                     Your stated purpose to return to Australia is evident on the ability to permanently live in Australia by both the taxpayers having the Australian permanent residence visas and your children are citizens of Australia.

Family and business/employment ties

•                     The whole immediate family lives in Country A.

•                     Taxpayer's 1 full time employment is located in XXXXX.

Maintenance and location of assets

•                     You have two Australian real properties and investment shares.

•                     XXXXX has one property and a family car in Country A.

•                     You both have a bank accounts, in Australia and in Country A.

Social and living arrangements.

•                     Since leaving Australia, you have kept your professional, social connections in Australia.

•                     You are renting your residential property Address A an annual basis. You intend to move back once the work contract ends.

•                     Your children are enrolled in Country A schools.

•                     Taxpayer 1 has not severed employment ties in Australia, but this permanent employment is located in Country A.

•                     Your accommodation while in XXXXX is in Taxpayers 1's house.

Therefore, you are not a resident of Australia under this 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 both born in Country A and your domicile of origin is Country A. Taxpayer 1 was granted Australian permanent residency visa on XX/XX/20XX and Taxpayer 2 was granted on XX/XX/20XX.

However, you have both been in Country A since XX/XX/20XX and you are citizens of Country A.

As such, it is considered that you did not abandon your domicile of origin and acquired a domicile of choice in Australia. You both abandoned residency in Australia and commenced living overseas.

Therefore, you are both not a resident of Australia under this 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 been in Australia for 183 days or more in the 20XX income year. Therefore, you will be a resident under this test for the 20XX income year.

You have been in Australia for XXXX days in the 20XX income year. Therefore, you will be a resident under this test unless the Commissioner is satisfied that your usual place of abode was outside Australia, and you do not have an intention to take up residence in Australia.

Usual place of abode

In the context of the 183-day test, a person's usual place of abode is the place they usually live and can include a dwelling or a country. A person can have only one usual place of abode under the 183-day test. However, it is also possible that a person does not have a usual place of abode. This is the case for a person who merely travels through various countries without developing any strong connections.

If a person has places of abode both inside and outside Australia, then a comparison may need to be made to determine which is their usual place of abode. When comparing two places of abode of a particular person, we will examine the nature and quality of the use which the person makes of each particular place of abode. It may then be possible to determine which is the usual one, as distinct from the other or others which, while they may be places of abode, are not properly characterised as the person's usual place of abode: Emmett J at [78] in Federal Commissioner of Taxation v Executors of the Estate of Subrahmanyam [2001] FCA 1836.

Application to your situation

The Commissioner is satisfied you did intend to take up residence in Australia for the 20XX income year because:

•                     You maintained your usual place of abode as Country A

•                     You lived in Country A in such a manner that you resided in Australia.

Intention to take up residency

To determine whether you intend to take up residence in Australia, we look at evidence of relevant objective facts. 'Intend to take up residency' does not merely mean intend to stay for a long time. It means intending to live here in such a manner that you would reside here.

Application to your situation

The Commissioner is satisfied that you did intend to take up residence in Australia for the 20YY income year because:

•                     Taxpayer 1 has not severed employment ties in Australia.

•                     You both have Australian permanent residency status.

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 both 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 both not a resident under this test for the 20XX income year

You are both not residents of Australia for tax purpose for the 20XX income year because you do not satisfy the residency tests listed below:

1.            The resides test.

2.            The domicile test.

3.            The 183-day test.

4.            The Commonwealth Superannuation Fund test.

Question 2 & 3

In determining your liability to pay tax in Australia, it is necessary to consider any applicable double tax agreement. Sections 4 and 5 of the International Tax Agreements Act 1953 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.

Where income is not subject to tax in Australia by virtue of the provisions of a double tax agreement Australia has with another country, it is exempt income under subsection 6-20(2) of the ITAA 1936.

Article 15 of the double tax agreement with Country X (Country X Agreement) deals with dependent personal services. It states that salaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State.

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 (2017) will often need to be considered in interpreting double tax agreements.

In respect to the exercising of employment and related considerations, the OECD Commentary on Article 15 provides the following general guidance:

•                     Employment is exercised in the place where the employee is physically present when performing the activities for which the employment income is paid.

•                     Member countries have generally understood the term 'salaries, wages and other similar remuneration' to include benefits in kind received in respect of an employment (e.g. stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships).

•                     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.

•                     Payments may be made after the termination of employment pursuant to various deferred remuneration arrangements. Such a payment should be treated as remuneration covered by Article 15 and, to the extent that it can be associated to a specific period of past employment in a given State, it should be considered to be derived from the employment activities exercised in that State.

In your case, you are caring out employment services in Country A for a period as a tax resident of Country A and are not a tax resident of Australia. Therefore, Article 15 of the Country A Agreement provides that the salary, wages or other similar remuneration you derived from your employment is only taxable in Country A. This is the case with the employment income you derive when you work in Country A.

Therefore, the payments you receive as remuneration will only be taxable in Country A, and Australia will have no right to tax the payments.