Income Tax Ruling IT2650

In order to provide guidance to individuals in relation to the Resides Test and the Domicile Test, in 1991 the Tax Office issued Income Tax Ruling 2650 (IT 2650). If you are going overseas to work for an extended period, it is essential that you read this ruling.

Two of the key sections of the ruling are extracted as follows:

This ruling focuses on the first two test referred to in paragraph 3, being the tests most widely applicable to persons who ordinarily reside in Australia but who leave Australia temporarily and are not actually living in Australia during the year of income.
Summary of Ruling

The Ruling concludes, bearing in mind the wide, general language used in the first test in the “resident” definition, and the state of satisfaction which must be reached in the second test, that it is not possible to provide conclusive rules for determining the residency status of individuals leaving Australia temporarily. The Ruling says, however, that the following factors need to be taken into account:

  • The intended and actual length of the individual’s stay in the overseas country;
  • Any intention either to return to Australia at some definite point in time or to travel to another country;
  • The establishment of a home outside Australia;
  • The abandonment of any residence or place of abode the individual may have had in Australia;
  • The duration and continuity of the individual’s presence in the overseas country; and
  • The durability of association that the individual has with a particular place in Australia.

The weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive.

In practice, the Tax Office uses the above factors a bit like a checklist to determine whether an individual is resident for tax purposes or not.However, not all factors are equal.

As an example, the actions you might take if you wanted to be classified as being foreign resident for tax purposes are as follows:

  • Sign a three year contract indicating an intention to work overseas for an extended period of time and actually go overseas and work for three years.
  • Not have a specific date of return in mind when leaving Australia.
  • Establish a home (leased, rented or company provided) in the foreign country where you are based while overseas.
  • Sell or rent out your previous main residence while overseas.
  • Actually spend the bulk of the three year overseas assignment in the overseas country … and not travelling around from one country to another.
  • Build close ties with the country in which you are working – e.g. join local clubs in the overseas country and cease memberships with clubs you had in Australia.

You might also do the following:

  • Take your name off the Electoral Roll – so you can’t vote while you are overseas.
  • Put your Medicare card ‘on hold’ and not use the card while you are overseas.
  • Sell your car or put it in storage.

The Tax Office does not have a points system to help you to determine the weight of each factor. There are clearly grey areas in the ruling and you have to look at your overall position to determine your residency status.

The ruling provides examples of situations where individuals have been classified as resident or foreign resident. These provide an indicative guide, but you might find that your personal circumstances do not align with one of the examples. If that is the case, you should seek professional advice.

It should be noted that there is nothing within the Tax Act that says you need to go overseas for a period of 2 years to become a foreign resident but in paragraph 25 of the ruling, the following statement is made:

As a broad rule of thumb, a period of about 2 years or more would generally be regarded by this Office (the Tax Office) as a substantial period for the purposes of a taxpayer’s stay in another country. It must be stressed, however, that the duration of the taxpayer’s actual or intended stay out of Australia is not, of itself, conclusive and needs to be considered with all of the factors in paragraph 23 above.

The ‘broad rule of thumb’ is helpful in the sense that it gives individuals a minimum timeframe that they need to be overseas in order to satisfy the Tax Office requirements, but clearly the time period spent overseas has to be considered in conjunction with the other factors mentioned in the ruling.

Once again, you must consider how the law applies to their particular facts and circumstances.