Assessability of UK sourced income by a taxpayer with dual residency

Is the business income derived by an individual taxpayer from the United Kingdom (UK) assessable under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) where the taxpayer is a dual resident?

No. The business income derived by the dual resident individual taxpayer from the UK is not assessable under subsection 6-5(2) of the ITAA 1997 as it is exempt from tax under Article 5(1) of Schedule 1 to the International Tax Agreements Act 1953 (the Agreements Act).

The taxpayer is a resident of Australia for income tax purposes.

The taxpayer migrated to Australia from the UK.

The taxpayer carries on a business in UK and relies solely on income derived from their UK business. The taxpayer's business does not have a permanent establishment in Australia.

The taxpayer also owns a rental property in the UK.

The taxpayer contributes to their UK state pension, private pension and national insurance contributions.

The taxpayer has no employment in Australia.

The taxpayer travels regularly to the UK to attend to their business and to visit family members.

The taxpayer maintains a home in the UK and resides there during their visit.

The taxpayer's presence in the UK varies depending on the requirements of their business. Some of the visits lasted only a few months, while others lasted over 6 months.

The taxpayer is considered to be a UK resident for taxation purposes by the relevant UK taxation authority.

The taxpayer's children are enrolled in school in Australia. The taxpayer's assets in Australia include a house, bank account and a motor vehicle.

The taxpayer has a large number of friends both in the UK and in Australia.

Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In determining liability to tax on foreign sourced income received by the taxpayer, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the Agreements Act.

Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions).

Schedule 1 to the Agreements Act contains the double tax agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (the UK Agreement). Schedule 1A of the Agreements Act contains the protocol amending the UK Agreement (the UK Protocol) The UK Agreement and the UK Protocol operate to avoid the double taxation of income received by Australian and UK residents.

Article 3(2)(a) of the UK Agreement provides (under a tie-breaker test) that where the individual taxpayer is a resident of both UK and Australia, the taxpayer will be treated solely as a UK resident: (i) if the taxpayer has a permanent home available in the UK and has no permanent home available in Australia; (ii) if (i) above is not applicable but the taxpayer has an habitual abode in the UK and has no habitual abode in Australia; (iii) if (i) or (ii) above are not applicable but the territory with which the taxpayer's personal and economic relations are closest is the UK.

Paragraph 15 of the OECD Model Tax Convention on Income and on Capital has commentary on Article 3 which states that if an individual has a permanent home in both countries it is necessary to look at the facts to ascertain the closer personal and economic relations including family and social relations, occupation, political, cultural or other activities and place of business . The commentary takes the view that: If a person who has a home in one state sets up a second in the other state while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first state.

As the taxpayer has a permanent home available at all times in UK and Australia, the first tie-breaker test in Article 3(2)(a) of the UK Agreement will not apply.

The second tie-breaker test in Article 3(2)(a) of the UK Agreement will not apply having regard to the length of time spend in the UK and in Australia by the taxpayer, it cannot be definitively said that the taxpayer lived more frequently in one country than the other.

The taxpayer's personal and economic relations are closest to the UK having regard to the taxpayer's family, social relations, occupation, other activities and place of business. Therefore, the taxpayer will be treated solely as a UK resident as the third tie-breaker test in Article 3(2)(a) of the UK Agreement applies.

Article 5(1) of the UK Agreement provides that industrial or commercial profits of a UK enterprise will be exempt from tax in Australia unless the enterprise carries on trade or business in Australia through a permanent establishment. The term 'UK enterprise' is defined in Article 3(5) of the UK Agreement to mean an industrial or commercial enterprise or undertaking carried on by a UK resident. The term 'industrial or commercial profits' is defined in Article 5(7) of the UK Agreement to include income derived by an enterprise from the conduct of a trade or business.

Paragraph 66 of Taxation Ruling TR 98/17 states where the tie-breaker tests in an agreement provide that a dual resident be treated solely as a resident of the treaty partner country for the purposes of the agreements, most foreign source income of that individual is not subject to tax in Australia, and the terms of the relevant double tax agreement should be referred to when determining tax liability of the individual taxpayer.

As the taxpayer's business has no permanent establishment in Australia and the taxpayer is treated solely as a UK resident under Article 3(2)(a) of the UK Agreement, the profits of taxpayer's UK business will be exempt from tax in Australia under Article 5(1) of the UK Agreement.

Accordingly, the business income derived by the individual taxpayer is not assessable under subsection 6-5(2) of the ITAA 1997.