Residency, Source and the Foreign Income Exemption

Mei's residency must be determined under the ordinary concepts test first, then the statutory tests in s 6(1) ITAA 1936. Under ordinary concepts, key factors include physical presence, intention, family and business ties, and habitual abode. Mei has strong Australian ties: she owns a rental property, holds an Australian driver's licence, maintains a bank account and club membership, and visits annually. However, her family (husband and children) lives in Singapore, her employment is there, and she has been absent since 2019. The ATO's approach (TR 98/17) suggests that a person who has established a permanent home abroad and whose family is abroad is likely a non-resident under ordinary concepts, despite retained ties. Mei's intention to return in 2027 is relevant but not decisive; a definite intention to return can support residency if the absence is temporary, but here the absence has been lengthy and her family life is in Singapore. The domicile test (s 6(1)(a)(i)) would make her a resident if her domicile is Australia unless the Commissioner is satisfied her permanent place of abode is outside Australia. Her domicile of origin is Australia; she has not adopted a domicile of choice in Singapore because she intends to return. However, her permanent place of abode is Singapore while she lives there with her family, so the exception may apply. The 183-day test is not met (21 days). The Commonwealth superannuation test is irrelevant. The strongest argument for non-residency is the permanent place of abode exception, but the ATO may argue that her retained Australian ties and intention to return mean her permanent place of abode is not firmly established abroad. If she is a resident, her foreign employment income is assessable under s 6-5, but she may qualify for the foreign income exemption under s 23AF if the employment is for a continuous period of 91 days or more and she is a resident for the whole period. However, s 23AF applies to foreign service, and her Singapore employment may qualify. Alternatively, she could be taxed on foreign income with a foreign income tax offset for Singapore tax paid. If she is a non-resident, only Australian-source income is assessable: the rent and dividends are Australian-source and assessable, but she is not entitled to franking credits (s 207-20 ITAA 1997) and pays non-resident withholding tax on unfranked dividends (though franked dividends are exempt from withholding). She would also be liable for CGT on the rental property only on a post-CGT basis, but non-residents are subject to CGT on taxable Australian property. The dividends: as a non-resident, franked dividends are not assessable and no franking credits; unfranked dividends subject to withholding. As a resident, both are assessable with grossed-up franking credits. Mei's prior treatment as a non-resident does not bind the Commissioner if her circumstances changed or were misrepresented. She should seek a private ruling or amend returns if necessary. The better view is that she remains a non-resident under ordinary concepts because her permanent home and family are in Singapore, but the domicile test may catch her unless the permanent place of abode exception applies. Given her intention to return, the ATO may argue she is a resident. This is a judgement call requiring weighing of factors.

If Mei is a resident, her assessable income includes her worldwide income: the Singapore salary of SGD 180,000 (translated to AUD at the applicable exchange rate, say AUD 200,000 for illustration) and the Australian rental income of AUD 38,000 and dividends of AUD 12,000 plus franking credits. The salary is foreign-source income and is assessable under s 6-5. She may be entitled to a foreign income tax offset (FITO) for Singapore tax paid on the salary, under Division 770 ITAA 1997. The FITO is limited to the Australian tax payable on the foreign income (the offset cap). Assume Singapore tax at 15% = SGD 27,000 (AUD 30,000). The Australian tax on the foreign income is calculated by applying the average rate of tax to the foreign income. If her taxable income is AUD 250,000 (including salary, rent, dividends and franking credits), the average rate might be around 30%, so Australian tax on the foreign income is about AUD 60,000. The FITO is the lesser of the foreign tax paid (AUD 30,000) and the offset cap (AUD 60,000), so she gets a FITO of AUD 30,000. The dividends: the unfranked amount is AUD 12,000, and assume franking credits of AUD 5,143 (30% company tax). As a resident, she includes the dividend and franking credit in assessable income (s 44 ITAA 1936 and s 207-20 ITAA 1997). The franking credit is included in assessable income but she also gets a tax offset for the franking credit. The rental income is assessable under s 6-5, and she can deduct expenses. She is not entitled to the foreign income exemption under s 23AF because her Singapore employment is not foreign service for a continuous period of 91 days or more while a resident? Actually s 23AF applies to foreign service of 91 days or more, and she is a resident, so it could apply if the employment is continuous. However, s 23AF requires the foreign service to be continuous and the person to be a resident for the whole period. If she is a resident for the whole year, and the Singapore employment is continuous for 91 days or more, the salary may be exempt under s 23AF. But s 23AF applies to foreign service as an employee, and the exemption is for foreign-source income from that service. Mei's employment is in Singapore, so it could qualify. However, s 23AF is intended for Australian residents working overseas temporarily, not for permanent migrants. If she is a resident, s 23AF may exempt the salary, but then she would not get a FITO for the Singapore tax. The better view is that s 23AF does not apply because her employment is not temporary foreign service; she is a permanent resident of Singapore. Therefore, the salary is assessable with a FITO. The dividends are assessable with franking credits. The rental income is assessable. She should also consider CGT on the rental property if sold, but no sale is mentioned. Assumptions: exchange rate, Singapore tax rate, franking credit rate. The answer should note that the FITO is non-refundable and excess cannot be carried forward (though excess foreign tax may be carried forward in some cases? Actually FITO excess can be carried forward for up to 5 years? No, FITO is non-refundable and excess cannot be carried forward, except for certain foreign tax. Under s 770-10, the offset is non-refundable and excess is not carried forward, but there is a carry-forward of excess foreign tax? I think the FITO is limited to the offset cap and excess foreign tax is not carried forward. So she loses the excess if any. The franking credit is refundable to the extent it exceeds tax payable, because she is a resident. If she were a non-resident, franking credits are not available. So residency makes a big difference.