Assessability of stipend received under a research fellowship by dual resident of Australia and of the United States

Is a stipend received by a taxpayer who is a resident of Australia and of the United States (US) under a research fellowship carried out in Australia included in the taxpayer's assessable income under subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes. The stipend received by a taxpayer who is a resident of Australia and of the US under a research fellowship carried out in Australia is included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.

The taxpayer is a citizen of the US and a resident of the US for US income tax purposes.

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

The taxpayer has a permanent home available in the US at all times during their presence in Australia.

While in Australia, the taxpayer will reside in rented accommodation.

The taxpayer will be present in Australia for a period of no more than 10 months in order to complete a fellowship program offered by a Research Fund.

The taxpayer may be nominally placed in an academic institution, a government department or a private institution for the purposes of carrying out their research activities.

The taxpayer will receive a stipend paid by an Australian institution on behalf of the Research Fund.

The stipend will be paid on a periodic basis.

The stipend is designed to assist with the taxpayer's living expenses while in Australia.

The taxpayer is not required to provide personal services to the Australian institution, the Research Fund or to any of the institutions that the taxpayer may be placed with.

The taxpayer is not a full time student of an Australian educational institution.

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

A stipend paid on periodic basis is ordinary income for the purposes of subsection 6-5(2) of the ITAA 1997.

Subsection 6-15(2) of the ITAA 1997 provides that if an amount is exempt income then it is not assessable income.

Section 11-15 of the ITAA 1997 lists those provisions dealing with income which may be exempt. Included in this list is section 51-10 of the ITAA 1997 which deals with educational allowances made to a full-time student at a school, college or university.

As the stipend will not be paid to the taxpayer in their capacity as a full-time student at a school, college or university it will not be exempt under section 51-10 of the ITAA 1997.

In determining liability to Australian tax on income it is necessary to consider not only the income tax laws, but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (the Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that those Acts are read as one.

Schedule 2 of the Agreements Act contains the double tax agreement between Australia and the US (the US Convention). Schedule 2A to the Agreements Act contains the US Protocol, amending the US Convention (US Protocol). The US Convention and the US Protocol operate to avoid the double taxation of income received by Australian and US residents. The US Protocol entered into force in Australia on 13 May 2003 and has effect in respect of income tax other than withholding taxes for any year of income beginning on or after 1 July 2004.

Article 4 of the US Convention provides tests of residency, which are used where the individual would otherwise be a resident of two countries ('tie breaker tests'). The tie breaker tests ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income. The tie breaker tests do not change a taxpayer's residency status for domestic law purposes.

Article 4(2) of the US Convention provides that a person's residency status for the purpose of applying the US Convention shall be determined as follows: (a) the person shall be deemed to be a resident of the country in which he/she has a permanent home available (b) if the person has a permanent home in both countries, or does not have a permanent home in either, the person will be deemed to be a resident of the country in which he/she has a habitual abode (c) the person has a habitual abode in both countries, or does not have a habitual abode in either, the person will be deemed to be a resident of the country with which his/her personal and economic relations are closest.

Article 4(2) of the US Convention provides that in determining an individual's permanent home, regard should be had to the place where the individual dwells with their family. In determining a person's personal and economic relations, regard should be had to their citizenship.

The terms 'permanent home', 'habitual abode', 'personal', and 'economic relations 'are otherwise undefined. Article 3(2) of the US Convention provides that any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the domestic laws of each country.

Taxation Ruling TR 2001/13 discusses the Commissioner's views about interpreting double tax agreements. At paragraph 104, it says that the OECD Model Tax Convention and Commentary will often need to be considered in interpreting double tax agreements.

The OECD Commentary provides that in relation to a 'permanent home': (a) for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (eg travel for pleasure, business travel, attending a course etc) (b) any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room.

The taxpayer has a permanent home available to them in the US. The property rented by the taxpayer in Australia may also qualify, but it is unlikely that the home has the required element of permanency given their stay in Australia will be no more than 10 months.

In the event that the taxpayer's residence in Australia could be considered a permanent home, it would be necessary to progress to the second tie breaker test.

In general terms, a habitual abode can be seen as the physical place in which an individual would normally live. This is not merely a test of where a person stays more frequently but also looks to whether living in a particular country is 'normal' having regard to the taxpayer's pattern of life.

The OECD Commentary provides that all stays in each country, regardless of the purpose for the stays, should be considered in order to assign a preference to a particular country.

Further, the comparison must be made over a sufficient length of time for it to be possible to determine whether the residence in each country is habitual and to also determine the intervals at which the stays take place.

Because of the nature of the taxpayer's circumstances, it is considered that the taxpayer has a habitual abode in the US and in Australia.

In considering a person's personal and economic relations, the OECD Commentary provides that regard should be had to family and social relations, occupation, political, cultural or other activities, place of business etc.

As the taxpayer's personal and economic ties are closest to the US and the taxpayer is a citizen of the US, the taxpayer will be treated as a resident of the US for the purposes of applying the US Convention. The same outcome would occur if it had been alternatively concluded that the taxpayer did not have a permanent home in Australia.

The taxpayer does not provide personal services in an independent capacity or as an employee and as such Articles 14 and 15 of the US Convention do not apply. As the taxpayer is not a full-time student, Article 20 does not apply.

Article 21 of the US Convention applies to income not otherwise dealt with in the US Convention.

Article 21(1) of the US Convention provides that items of income of a resident of the US, wherever arising, not dealt with in the foregoing Articles of the US Convention shall be taxable only in the US.

However, Article 21(3) of the US Convention provides that items of income of a US resident from sources in Australia may also be taxed in Australia.

Therefore, the stipend received by the taxpayer may be taxed in Australia and the US.

Therefore, as the stipend is not otherwise exempt under the ITAA 1997, the stipend received by the taxpayer who is a resident of Australia and of the US under a research fellowship carried out in Australia will be included in the taxpayer's assessable income under subsection 6-5(2) of the ITAA 1997.