Jurisdiction, Residency, Source and Derivation
Australian income tax is jurisdictional. Before classifying income, ask whether Australia has the right to tax the taxpayer and the receipt. Residency, source and derivation answer different questions and must not be collapsed into one test.
What you should be able to do
- Apply the individual residency tests and understand how they interact.
- Distinguish tax residency from immigration status.
- Determine source as a practical question of fact.
- Explain when income is derived and why cash and accrual methods differ.
- Apply constructive receipt and timing principles to salary and business income.
- Work through Hillary's facts by period and income year.
Residency answers 'how wide is Australia's tax net for this person?' Source answers 'where did this income come from?' Derivation answers 'when does the amount enter the tax calculation?' Keep those questions separate.
Key language
Issue → Rule → Authority → Application
2.1 The jurisdiction question comes before the income question
Before asking whether a receipt is ordinary or statutory income, Australian income tax law often requires a more basic question: why does Australia have jurisdiction to tax this taxpayer or this income? The answer usually depends on residence and source. Broadly, an Australian tax resident is exposed to Australian income tax on worldwide ordinary and statutory income, while a foreign resident is generally taxed only on Australian-sourced income, subject to specific statutory rules and treaties. The course directs students to ITAA97 ss 6-5(2), 6-5(3), 6-10(4) and 6-10(5).
This means a strong answer separates four questions that weaker answers often blur together: (1) Is the taxpayer an Australian resident? (2) If not, does the income have an Australian source? (3) When was the income derived? (4) Is a treaty or special rule relevant?
2.2 Residence is a tax concept, not an immigration label
Section 995-1(1) ITAA97 directs the reader to the definition of “resident” in s 6(1) ITAA36. For an individual, s 6(1) contains several alternative routes to residence. A taxpayer need satisfy only one. The ordinary concepts test asks whether the person “resides” in Australia according to ordinary meaning. The domicile test can treat a person as resident where their domicile is in Australia unless the statutory exception applies. The 183-day test addresses physical presence during the income year, subject to its exception. The Commonwealth superannuation limb applies to specified members and certain family members.
Do not write: “Hillary is a resident because she lived in Sydney.” Write: “Hillary must be tested separately under each applicable limb of s 6(1) ITAA36. The strongest issue is ordinary concepts; the 183-day test must also be checked for each income year; domicile requires separate analysis.”
2.3 Ordinary concepts residence: quality of presence, not just day counting
TR 2023/1 is a major course authority. It explains that residence under ordinary concepts concerns whether a person's presence is usual and settled rather than merely temporary or casual. Relevant factors include physical presence, intention and purpose, conduct while in Australia, family and employment ties, assets, and social and living arrangements. No single factor is decisive.
Levene v IRC and Lysaght v IRC illustrate that residence is a question of degree and connection. Repeated or regular presence, accommodation and continuity can support residence even where the taxpayer maintains substantial foreign connections. Conversely, a short, clearly temporary work assignment may not establish the necessary settled quality.
In a problem question, organise facts under headings rather than recounting them chronologically: duration; accommodation; purpose; family/relationship ties; employment; financial arrangements; social integration; retained overseas home; stated intention; and actual conduct. Then weigh those factors collectively.
2.4 The domicile test: domicile plus “permanent place of abode”
The domicile limb of s 6(1) ITAA36 operates differently from ordinary concepts. A person whose domicile is in Australia will be resident unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia. Domicile is a legal concept. The course also directs attention to s 10 of the Domicile Act 1982 (Cth), under which acquiring a domicile of choice involves an intention to make a home indefinitely in the relevant country.
FCT v Applegate is the leading course authority on the phrase “permanent place of abode”. “Permanent” does not mean everlasting. The question is whether the overseas abode has a degree of permanence inconsistent with a merely temporary or transitory stay. FCT v Jenkins reinforces that a fixed period can still be sufficiently permanent; an intended stay of substantial duration does not become temporary merely because the taxpayer eventually returns early.
The exam trap is to ask only how long the taxpayer was absent. Duration matters, but so do the living arrangements, abandonment or retention of Australian accommodation, family arrangements and objective character of the overseas home.
2.5 The 183-day and Commonwealth superannuation tests
The 183-day limb asks whether the individual was actually present in Australia, continuously or intermittently, for more than half of the income year. It contains an exception concerning the taxpayer's usual place of abode and intention to take up residence. Do not reduce the test to “more than 183 days = resident” without stating the exception.
The Commonwealth superannuation limb is technical and should be applied by reference to the exact statutory categories in s 6(1), including specified scheme members and certain spouses or children. In most problem questions it can be disposed of quickly if the facts show it is irrelevant, but a complete answer acknowledges it.
2.6 Temporary residents: residence does not always mean full worldwide taxation
The concept of a “temporary resident” is defined through s 995-1(1) ITAA97 and associated provisions. It matters because a person may be an Australian tax resident yet receive concessional treatment for some foreign-source income and gains. Therefore, after concluding that a person is resident, ask whether temporary-resident rules alter the normal worldwide-income result.
This is a good example of the difference between status and tax consequence. Residence is one classification. Temporary-resident treatment is a later statutory question. Do not merge them.
2.7 Company residence
Section 6(1) ITAA36 also contains the company-residence definition. A company incorporated in Australia is resident. A company not incorporated here can still be resident where the statutory tests concerning carrying on business and central management and control, or voting power, are met. The course refers students to TR 2018/5 for central management and control. In company problems, identify where high-level strategic decisions are actually made rather than merely where lower-level operations occur.
2.8 Source of income: a practical question of fact
If the taxpayer is a foreign resident, source becomes central. Nathan v FCT provides the classic proposition that source is a practical, hard matter of fact. There is no single universal source test for every category of income.
For remuneration, FCT v French supports the importance of where the services are performed. But FCT v Mitchum warns against turning that factual indicator into an inflexible rule of law. Contractual arrangements and the true income-producing activity may alter the analysis.
For dividends, the course refers to Esquire Nominees Ltd v FCT and to s 44(1) ITAA36. For royalties, s 6C ITAA36 can deem Australian source in defined circumstances. The student should therefore ask: what produced the income? Work? Property? A contract? A business? Intellectual property? The source test follows the character of the income.
2.9 Derivation: when does income belong to the income year?
Even after residence, source and character are resolved, timing remains. Sections 6-5(2) and 6-5(4) are central for ordinary income. The law asks when income is “derived”, and the answer can depend on the taxpayer's activities and accounting method.
Carden's case is foundational. The method that gives a substantially correct reflex of income is selected in light of the taxpayer's circumstances. The cash/receipts basis may be appropriate for some personal-services activities, while an earnings/accruals basis may better reflect larger professional or business operations. The course then develops this through Henderson v FCT, Firstenberg, Dunn and Barratt, together with TR 98/1.
For an accruals taxpayer, derivation commonly occurs when a recoverable debt arises: the taxpayer has done what is required and has a legal entitlement to an ascertainable amount. Arthur Murray (NSW) Pty Ltd v FCT is important for prepaid amounts: receipt of cash does not necessarily mean the whole amount is derived immediately where the taxpayer has substantial unperformed obligations and the proper income treatment defers recognition.
Ballarat Brewing also assists with timing and accounting concepts. Interest may be constructively received when credited, while financial institutions can be subject to different accrual principles, as the course notes with TR 93/27.
2.10 Constructive receipt and payments directed to third parties
Section 6-5(4) prevents taxpayers from avoiding derivation merely by directing income to someone else or asking for it to be applied on their behalf. If an employer satisfies the employee's debt or pays a third party at the employee's direction out of salary otherwise due, the employee may still derive the amount. This principle becomes important in the Hillary tutorial.
2.11 Statutory and authority map
| Rule | Authority / provision | What the student should say |
|---|---|---|
| Resident worldwide income | ITAA97 ss 6-5(2), 6-10(4) | An Australian resident generally includes ordinary/statutory income from all sources. |
| Foreign resident | ITAA97 ss 6-5(3), 6-10(5) | Generally limited to Australian-sourced amounts and other specifically included income. |
| Individual residence | ITAA36 s 6(1); TR 2023/1 | Apply each relevant test separately. |
| Permanent place of abode | Applegate; Jenkins | Permanent means more than temporary/transitory, not everlasting. |
| Source | Nathan; French; Mitchum | Source is factual; place of services is important but not an absolute rule. |
| Derivation method | Carden; Henderson; TR 98/1 | Use the method giving the substantially correct reflex of income. |
| Prepayments | Arthur Murray | Cash received in advance may not all be derived immediately where obligations remain. |
2.12 Tutorial masterclass — Hillary's Australian secondment
Hillary's facts are designed to test changes over time. She initially comes to Australia for four months, stays in hotels and serviced apartments, remains paid by the UAE office, retains her principal financial and personal ties in Dubai and intends to return. Later she accepts a 10-month extension, rents a furnished Sydney apartment, moves belongings, opens an Australian bank account, obtains a local mobile plan and joins a professional network. A good answer must consider whether the quality of her presence changes from June 2026.
Issue 1 — Residence for 2025–26
Apply ordinary concepts first. Her initial four-month secondment looks temporary: short defined duration, temporary accommodation, strong Dubai ties and an intention to return. The extension and move into an apartment strengthen the Australian connection. Do not state a conclusion solely from her expressed intention; compare intention with objective conduct. Then check the 183-day test for that income year and the domicile test. Her foreign background and continuing Dubai home/ties are highly relevant.
Issue 2 — Residence for 2026–27
The longer period, established apartment and local arrangements make ordinary-concepts residence more arguable. The 183-day test also becomes important because she remains in Australia for much of the year. Analyse the statutory exception rather than counting days only.
Issue 3 — Salary source
For periods in which Hillary is a non-resident, ask whether salary attributable to work physically performed in Australia has an Australian source. French strongly supports that result on ordinary employment facts, while Mitchum reminds you to consider the contract and the real source rather than assert a rigid rule.
Issue 4 — Timing and redirected salary
Amounts paid by the employer to discharge Hillary's accommodation debt or paid to her partner at Hillary's request are not ignored merely because they bypass Hillary's bank account. Apply constructive receipt. The requested deferral of $4,000 from 30 June to 5 July raises a separate derivation issue: was the income already derived or constructively received when it was due and dealt with at her direction? Use the facts and the course's reference to Brent v FCT carefully.
2.13 HD IRAC structure for a residency problem
I — Issue
Whether Hillary was an Australian resident during each relevant period; if not, whether salary was Australian-sourced; and when the June salary was derived.
R — Rule
Set out ITAA36 s 6(1) by separate tests, ITAA97 ss 6-5(2)–(4), the source principles in Nathan, French and Mitchum, and the derivation authorities relevant to salary and constructive receipt.
A — Application
Apply each residence test to each period. Do not treat residence as an all-year label where facts change. Then classify the salary attributable to Australian work and analyse the payments/deferral separately.
C — Conclusion
State the better view for each income year and quantify which salary amounts enter Australian assessable income on that view. Identify any alternative outcome if residence is genuinely contestable.
2.14 Plain-English summary
Residence tells you how wide Australia's tax net is. Source tells you whether Australia can tax particular income of a foreign resident. Derivation tells you the income year in which the amount enters the calculation. Keep those questions separate. Apply every relevant s 6(1) residence test, use source cases according to the type of income, and then deal with timing. If the facts change during the year, your legal analysis may also change during the year.
Deep Teaching Commentary — Learn the Doctrine, Then Learn How to Use It
Jurisdiction is a gatekeeping question. Before deciding whether a salary, dividend, interest receipt or business profit is income, a student must determine the scope of Australia’s claim to tax that taxpayer. The statutory rules distinguish residents and non-residents and then use source rules to identify which Australian-connected amounts are taxable to non-residents. Residence and source must therefore be analysed before the detailed character of the receipt.
Individual residence is not determined by citizenship, visa status or a single day count. The s 6(1) ITAA36 definition contains several alternative tests. A taxpayer can be resident under ordinary concepts even if another statutory test is not satisfied. Conversely, a person who spends substantial time in Australia may remain non-resident depending on the facts and the statutory exceptions. Each test should be applied separately and the conclusion should identify the date or period for which residence changes.
Derivation is a different problem again. It allocates income to an income year. The source materials contrast cash and accruals approaches and emphasise that the correct method depends on the nature of the income-producing activity. Constructive receipt prevents timing manipulation where money is credited or dealt with at the taxpayer’s direction.
Provision-by-provision teaching guide
| Provision / regime | What it does | How to use it in a university answer |
|---|---|---|
| ITAA97 ss 6-5(2), 6-5(3), 6-10(4), 6-10(5) | These provisions define the jurisdictional reach of ordinary and statutory income for residents and foreign residents. | State the taxpayer’s residence status first, then use the correct subsection to determine the geographical scope of assessable income. |
| ITAA97 s 995-1(1) and ITAA36 s 6(1) | The ITAA97 definition of Australian resident points back to the ITAA36 residence definition. For individuals, analyse the resides test and each statutory inclusion separately. | Do not merge the tests into a single impressionistic conclusion. |
| Domicile Act 1982 (Cth) s 10 | The domicile test requires attention to domicile and whether the person has a permanent place of abode outside Australia; the Domicile Act informs acquisition of a domicile of choice. | Use when a taxpayer has Australian domicile but is living overseas, or has moved countries with an asserted indefinite intention. |
| Temporary resident definition in ITAA97 s 995-1(1) | A person can be an Australian resident yet obtain modified tax treatment as a temporary resident if the statutory conditions are satisfied. | Keep residence and temporary-resident status analytically separate. |
| ITAA36 s 6(1) company residence | Company residence is governed by its own limbs, including incorporation and the statutory central-management/control/voting-power framework. | Do not apply the individual residence tests to a company. |
| ITAA36 s 44(1) and s 6C | The materials identify statutory source rules for dividends and royalties in addition to ordinary source principles. | Check for a specific source rule before relying only on common-law source analysis. |
| ITAA97 ss 6-5(4) and 6-10(3) | Constructive receipt treats an amount as derived where it is applied or dealt with on the taxpayer’s behalf or as directed. | Use when salary or other income is redirected, credited or paid to a third party. |
Cases, rulings and authorities — proposition + exam function
| Authority | Proposition taught by the source material | When to use it |
|---|---|---|
| Lysaght v IRC [1928] AC 234 and Levene v IRC [1928] AC 217 | Foundational authorities on residence under ordinary concepts and the weight given to the quality, continuity and pattern of a person’s presence. | Use to frame the resides-test analysis rather than relying on days alone. |
| Applegate v FCT 79 ATC 4307 | “Permanent” in permanent place of abode does not mean everlasting; it contrasts with temporary or transitory living arrangements. | Use in the domicile test when a taxpayer lives abroad for a substantial but not lifelong period. |
| FCT v Jenkins 82 ATC 4098 | A fixed overseas period can still be sufficiently permanent for the domicile test; early return does not necessarily destroy the original character of the overseas abode. | Use where the taxpayer planned an overseas assignment for a substantial fixed period. |
| Nathan v FCT (1918) 25 CLR 183 | Source is a practical, hard matter of fact. | Use as the opening authority in a source analysis. |
| FCT v French (1957) 98 CLR 398 | The place where services are performed is a strong source factor for employment income. | Use for ordinary salary/wage source. |
| FCT v Mitchum (1965) 113 CLR 401 | Rejects an inflexible rule that remuneration is always sourced where work is physically performed; contract and surrounding factors can matter. | Use as the counterweight to an oversimplified French analysis. |
| Carden’s case (1938) 63 CLR 108 and Henderson v FCT (1970) 119 CLR 612 | Key authorities on the cash/accruals derivation question for professional income and the nature/scale of the practice. | Use when deciding whether income is derived on receipt or when a recoverable debt arises. |
| Firstenberg; Dunn; Barratt | The course uses these authorities to demonstrate that derivation method depends on the organisation and scale of the professional activity. | Use to compare a sole practitioner, small practice and larger professional operation. |
Matching tutorial — fact-by-fact reasoning map
Analyse ordinary-concepts residence using the intended duration, accommodation, ties, purpose and continuity of presence. Then apply the domicile and 183-day tests separately.
A change in objective circumstances can alter residence prospectively. Explain why the extension, rented apartment, local banking and social/professional ties may strengthen residence even if the taxpayer says she plans to return to Dubai.
Evidence of an available home, family, financial connections and continuing employment in Dubai supports the counterargument. Explain the weight rather than merely listing the facts.
Start with where services are performed, then consider the contract and broader earning activity under French and Mitchum. Allocate source by period if the facts justify it.
Distinguish an advance that has become income from a mere loan or recoverable amount. Apply the derivation method and the legal entitlement to the amount.
Use constructive receipt if salary is credited or applied at Hillary’s direction. The timing question is legal derivation, not simply the date money reaches a personal bank account.
How to write this chapter in IRAC / tax-problem form
Issue. Identify the taxpayer, income year and transaction. Break the problem into separate receipts, outgoings, CGT events or administrative decisions. Do not write one broad issue such as “what tax is payable?”.
Rule / Law. Start with the exact Act and provision. If the section contains multiple limbs, subsections, paragraphs, exceptions or a method statement, set them out in the order in which they operate. Then add the case, ruling or ATO authority for the particular proposition it explains.
Application. Apply one fact to one legal element at a time. Compare the facts with the authority and deal with the strongest alternative characterisation. Where the law requires a calculation, show the legal order and the arithmetic together.
Conclusion. State the legal tax consequence and amount where possible. Then add any associated loss, penalty, objection/review, timing or administrative consequence relevant to the chapter.
Chapter mastery — 15 questions with model answers
Source-Coverage Audit — Every Statutory Reference in the Supplied Materials
This completeness layer preserves every detected Act, Part, Division, Subdivision, section, subsection, paragraph and method-statement reference from the supplied Forum/Tutorial materials. Use the teaching chapter above for explanation; use this audit to ensure no source reference is silently omitted.
Source-Coverage Audit — Every Case, Ruling and Authority in the Supplied Materials
Every detected case or ruling from the aligned materials is retained here. The blue link opens an AustLII search so the authority can be checked and later replaced with the most direct official/public judgment link where appropriate.
Detailed Forum / Lecture Source Notes — Completeness Layer
The following is the detailed teaching layer derived from the supplied Forum material. It is kept deliberately full at draft stage so that the final editing pass can improve prose without losing doctrine, examples, calculations or statutory detail.
Jurisdictional Aspects Of Australian Income Tax Law
In order to create a workable framework of taxation, a nation usually defines limits on its taxing capacity. These limits are referred to as the nation’s jurisdiction to tax.
The worldwide basis of taxation is the system commonly used in OECD countries (including Australia) to define a country’s jurisdiction to tax.
This means, in the context of Australia, that Australian tax residents are taxed on their worldwide income (ie income from both Australian sources and from foreign sources). On the other hand, tax non-residents of Australia are only subject to tax in Australia on their income from Australian sources.
Note the application of sections 6-5(2), 6-5(3), 6-10(4), 6-10(5) ITAA97.
The rationale for taxing the income of residents is that residents enjoy the benefits provided by the government of the country where they reside. As a result, it is fair that residents of that country should be taxed on their income so that those benefits can be paid for.
The rationale for taxing on a source basis is that income that is sourced in a particular country has been derived from the resources of that country (eg land, labour, natural resources, infrastructure etc). If the income of a foreign investor has been derived from resources of the host country then it is only fair that the host country should be able to tax so much of the investor’s income that has been sourced in the host country.
International tax rules derive from:
The Income Tax Assessment Act 1936 (Cth), Income Tax Assessment Act 1997 (Cth) and the International Tax Agreements Act 1953 (Cth); and
Australia’s Double Tax Agreements (see Treasury website).
Once a tax system decides to tax residents on a worldwide basis, the question of how that jurisdiction defines a ‘resident’ is obviously of critical importance.
Importantly, the criteria for determining a person’s residency status for taxation purposes are not the same as the criteria used to determine a person’s residency status for immigration purposes (although a person’s immigration status might be a relevant consideration in determining his or her residency status for tax purposes).
Section 995-1(1) ITAA97 defines an “Australian resident” as ‘a person who is a resident for the purposes of the ITAA36.
For individuals, s 6(1) ITAA36 defines a "resident" or resident of Australia to mean a person who resides in Australia and includes a person:
whose domicile is in Australia, unless the Commissioner is satisfied that the person's permanent place of abode is outside Australia;
who has actually been in Australia, continuously or intermittently, during more than one - half of the year of income, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; or
who is:
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
the spouse, or a child under 16, of a person covered by sub - subparagraph (A) or (B).
The following diagram summarises Australia’s current residency rules for individuals (sourced from: Board of Taxation, Review of the Income Tax Residency Rules for Individuals, August 2017, Annexure A):
Individual Rsidency Tests
Ordinary concepts test
Read Taxation Ruling TR 2023/1. The ATO says in TR 2023/1 (at paras19-21, 29-30]:
The ordinary meaning 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'.
The ordinary concepts test is asking whether your presence in Australia is usual and settled in contrast to temporary and casual. This is informed by both the nature, duration and quality of the person's physical presence and an intention to treat Australia as home.
Factors that commonly inform the relevant association with Australia are:
period of physical presence in Australia
intention or purpose of presence
behaviour while in Australia
family, and business or employment ties
maintenance and location of assets, and
social and living arrangements.
No single factor is necessarily decisive. The weight given to each factor varies depending on individual circumstances…
…In many cases, a visit to Australia of less than 6 months is not sufficient time to be regarded as residing here. This is because a person does not usually establish a durable connection to Australia in this time.
This, however, can be contrasted with a situation where a person has previously spent a long time in Australia despite only spending short periods in Australia in the relevant income year. In such a case, the shorter period of physical presence in Australia assumes less relevance if the person has retained a continuity of association with Australia, or a particular place within Australia, together with an intention to return to Australia and an attitude that Australia remains their home.
*Lysaght v IRC [1928] AC 234
*Levene v IRC [1928] AC 217
Consider the following Example 1 from TR 2023/1 (at paras 111 to 113):
Bjorn, a promising mid-fielder from Sweden, is offered an 18-month contract to play soccer in Australia for a club in the National Soccer League. The club provides accommodation for Bjorn and his family. As Bjorn intends to remain in Australia for the full term of his contract, he leases his house in Sweden, sells his car and redirects the family mail to Australia. His children attend an Australian school and his wife and children become involved in sporting activities.
However, Bjorn is having trouble acclimatising to Australian conditions. After withdrawing from yet another torrid session, Bjorn is put on notice to perform 'or else'. Bjorn's form continues to slide to the point that management seeks to terminate his contract on the grounds of non-performance. Bjorn's contract is paid out for an agreed sum. Four months after arriving in Australia, Bjorn and his family return to Sweden.
As Bjorn established that he intended to live in Australia for 18 months with his family and his behaviour over the 4 months is consistent with that intention, Bjorn resided in Australia from the day he arrived in Australia until the day he left.
Domicile Test
2 aspects to the test to be a resident:
The person must have a domicile in Australia, and
The person must not have a permanent place of abode outside Australia.
What is domicile?:
Domicile of origin - Domicile is attributed to a person at birth (common law rule - usually the country of their father’s permanent home, or their mother’s permanent home if the father is unknown or deceased).
Domicile of choice - According to s 10 Domicile Act 1982 (Cth), the intention that a person must have in order to acquire a domicile of choice in a country is the intention to make his or her home indefinitely in that country.
Domicile of dependence - Where a person lacks capacity to acquire their own domicile - their domicile is determined by reference to another person’s domicile (eg parent).
*Applegate v FCT 79 ATC 4307 - 'Permanent' in the context of the domicile test does not mean 'everlasting' but, rather, something that is 'more than temporary or transitory'.
FCT v Jenkins 82 ATC 4098 - a stay outside Australia for a fixed period can still be “permanent” rather than “temporary” if the period is of a substantial duration (eg 3 years in this case, although the taxpayer returned early after 18 months due to ill health).
The ATO says in TR 2023/1 (at 65-66, and 77]:
The word 'permanent' does not have the meaning of everlasting or forever, but is used in the sense of being contrasted with temporary or transitory.
In this test, the expression 'place of abode' refers to the physical surroundings in which you live, extending to a town or country. Therefore, it is not necessary to be living in a particular dwelling in a certain way for your place of abode to be considered permanent, provided that the nature of your presence in a town or country is consistent with both abandoning residency in Australia and living in that town or country in a permanent way….
…For practical purposes, it is convenient to set some 'rule of thumb' on what substantial means. Broadly, 2 years is considered to be a substantial period of time. What this means is that if your intended length of stay is less than 2 years, you are unlikely to be able to establish that your permanent place of abode is outside of Australia. Whether a stay of precisely 2 years or longer means you fall within the proviso will depend on the circumstances. The critical question is whether a person has in fact abandoned Australian residency and commenced to live in a permanent way overseas.
183-days test
The following criteria must be satisfied to meet this test:
The person must be in Australia more than half the year of income (183 days - continuously or intermittently)
UNLESS the Commissioner is satisfied that:
The person’s usual place of abode is outside Australia; and
The person does not intend to take up residence in Australia.
The ATO says in TR 2023/1 (at 90]:
Relevant factors in considering whether your usual place of abode is outside Australia include:
where you lived before and after your time in Australia
the availability of your overseas dwelling to you (if you have one) while you were in Australia
where your possessions and assets are
the type of visa you have and the length of your intended stay
your purpose of coming to Australia, and
the travel arrangements you made, including whether you departed from and returned to the same place outside Australia.
Commonwealth super test
This test applies to certain Australian government employees working overseas (eg diplomats and DFAT officials), and their spouses and children (aged under 16).
Temporary Residents
The non-Australian source income of individuals who are regarded as “temporary residents” of Australia for tax purposes is regarded as NANE income. As a result, temporary residents are now treated more like non-residents for tax purposes. [This point is only made for your awareness. You will not be tested on this point.]
A person is a "temporary resident" (as defined in s 995-1(1) ITAA97) if:
they hold a temporary visa granted under the Migration Act 1958 (Cth); and
they are not an Australian resident within the meaning of the Social Security Act 1991 (Cth); and
their spouse is not an Australian resident within the meaning of the Social Security Act 1991.
However, a person is not a temporary resident if they have been an Australian resident (as defined in s 6(1) ITAA36), and any of paragraphs (a), (b) and (c) above are not satisfied.
Residency Of Companies
A company is a resident under s 6(1) ITAA 36 if it:
is incorporated in Australia, or
carries on business in Australia, and
has either its central management and control in Australia, or
has its voting power controlled by shareholders who are residents of Australia.
Consider Taxation Ruling TR 2018/5.
Source Of Income
Source is relevant to non-residents.
Source of income is a question of fat that depends on the circumstances of each case.
The ascertainment of the actual source of a given income is a practical, hard matter of fact: Nathan v FCT (1918) 25 CLR 183.
If the source of income is an issue, examine the source rules that apply to that particular type of income.
Services
*FCT v French (1957) 98 CLR 398 - in this case, the source of personal exertion income was the place where work is performed.
But see FCT v Mitchum (1965) 113 CLR 401, where the High Court held that there is no rule of law that wages are always sourced where work is performed. In that case, the nature of the contract raised doubt whether it was simply wages for work performed in Australia.
Where: “…creative powers or special knowledge is involved to such a high degree that the place where those powers or knowledge are utilised is relatively unimportant, the dominant source may be the place where the contract was made (Mitchum…)”: Wolters Kluwer, Master Tax Guide 2026, at [21-070].
Trading stock
The source is generally the place where the trading activities take place. Apportionment is required if business takes place in a number of locations.
Real property
the source is the place where the property is located.
Other tangible or intangible property (not trading stock)
Source may be determined by factors such as the place of contract, place of negotiation and place of payment.
Interest
Emphasis is placed on the place where the loan contract was made and where the money was advanced.
Dividends
Section 44(1) ITAA36 provides the source rule.
The location of the fund of profits which is distributed as a dividend is the place where those profits are made: Esquire nominees Ltd v FCT 72 ATC 4076.
Royalties
The location of the industrial or intellectual property from which the royalty flows is the common law rule.
Where a royalty is paid by an Australian business to a non-resident, then s 6C ITAA36 deems it to have an Australian source.
In all of the above, the application of Australia’s Double Tax Treaties is a critical factor - not studied in this course.
Derivation Of Income
The system for recognising income in the ITAA36 and ITAA 97 is periodic. In order to calculate tax payable, a taxpayer must look at each year of income and record each event within that period.
Sections 6-5(2) and 6-5(4) ITAA97: when is ordinary income derived?
For statutory income, when is income recognised?
2 ways of recognising assessable income:
Cash basis - income is derived when it is received, either actually or constructively; and
Accruals basis - income is derived when it is earned.
Sarah is a solicitor who operates her legal practice as a sole trader.
During the CIY, Sarah receives $100,000 in fees in cash. Of this amount, $20,000 relates to tax invoices issued for services provided during the PIY, with the balance relating to services performed in the CIY. As at 30 June CIY, $30,000 of the fees earned for services provided during the CIY remain outstanding.
What amount of ordinary income has Sarah derived during the CIY: (i) on a cash basis; and (ii) on an accruals basis?
Answer: The correct method is that which gives ‘a substantially correct reflex of the taxpayer’s true income’: per Dixon J in Carden’s case.
Note that a taxpayer is not at liberty to choose between the cash or accruals method. The taxpayer must employ the method that gives ‘a substantially correct reflex of the taxpayer’s true income’ by examining the appropriateness of a particular method for the income year in question: Carden’s case.
When is it appropriate to use the cash basis and when is it appropriate to use the accruals basis? Consider:
DCT (SA) v Executor Trustee and Agency Co of South Australia Ltd (Carden’s case) (1938) 63 CLR 108 - sole medical practitioner.
Henderson v FCT (1970) 119 CLR 612 - large accounting practice.
FCT v Firstenberg 76 ATC 4049 - sole practitioner with one employee.
FCT v Dunn 89 ATC 4141 - sole practitioner with a few employees (mostly family)
Barrat & Ors v FCT 92 ATC 4275 - partners in a pathology practice, with many staff who generated sizeable income.
The case law and the Tax Office (see, for example, Taxation Ruling TR 1998/1) have established that the following factors are relevant to deciding which method to use:
Employees
Trading stock
Cash or credit sales
Capital equipment
Reliance on circulating capital - income derived from the turning over of revenue assets (and not solely from the skill and judgment of the principal of a business) points towards an accruals basis.
Size of the business
When is income ‘earned’?
As we know, when we account for income on an accruals basis, derivation does not turn on when payment is made.
The point of derivation usually occurs when a recoverable debt is created (ie when the taxpayer is legally entitled to an ascertainable amount as a result of having performed an agreed task (see paras 9-11 of Taxation Ruling TR 98/1)).
In many cases, this would occur when a taxpayer issues an invoice requiring the customer to make a payment or when the customer enters into a contract according to which the customer is obliged to make a payment. This general position is subject to a number of qualifications, including:
an invoiced amount might not be earned if it is subject to a subsequent discount;
an invoiced amount that is also received may not be earned if it is subject to a refund in certain cases; and
an invoiced amount is not derived if payment is contingent on the future provision of goods or services.
Ballarat Brewing Co v FCT (1951) 82 CLR 364.
*Arthur Murray (NSW) Pty Ltd v FCT (1965) 114 CLR 314.
Timing for particular types of income
The following types of income are further examples of income that are usually (although not necessarily) accounted for on a cash basis:
Salary and wages
Rent
Interest - note that interest credited to an account is received constructively. There are obviously exceptions here. For example, the interest income of financial institutions is usually derived on a daily accrual basis (Taxation Ruling TR 93/27).
Non-business income derived from the provision of knowledge or the exercise of skill by the taxpayer.
For dividends, see s 44(1) ITAA36. Dividends are recognised when ‘paid’ and paid is defined in section 6(1) to mean ‘credited or distributed’.
Note that just because a taxpayer derives income from one particular source on a cash basis, does not mean that all of his/her/its income is derived on the same basis. This can occur even for income of the same nature.
For example, interest charged by a seller of goods on overdue trade debts will be assessed on an accruals basis (where the provision of credit to customers is a regular feature of the business). However, interest derived by the same taxpayer on their investments would normally be assessed on a cash basis.
Matching Tutorial — Full Problem Source and Teaching Integration
The tutorial is part of the chapter, not an afterthought. Read the facts by turning each receipt, outgoing, event or procedural step into a separate issue. Write the relevant provision beside each issue before applying the cases.
Tutorial 2 - Week 3
Hillary is a UK citizen who moved to the United Arab Emirates (UAE) as a child when her parents relocated there for work. She has lived in Dubai since that time and she is not a tax resident of the UK. Hillary has been employed as a commercial lawyer at the Dubai office of an international law firm for the past five years. Hillary lives with her parents and maintains all of her bank accounts, investments, and personal ties in Dubai.
In late 2025, Hillary accepts a four-month secondment to her firm’s Sydney office, commencing on 3 February 2026, to support UAE-based clients expanding into Australia. Her role primarily involves advising on UAE law aspects of cross-border transactions and coordinating with Australian-qualified lawyers in the firm’s Sydney and Brisbane offices. She intends to return to Dubai at the end of this period.
From February to May 2026, Hillary stays in hotels and serviced apartments, travels between Sydney and Brisbane for work, and continues to be paid by the UAE office into her UAE bank account. During this time, Hillary begins a romantic relationship with an Australian citizen, which she regards as having long-term potential.
In late May 2026, Hillary is offered a 10-month extension in Sydney. She accepts the extension on 1 June 2026 on the basis that her job in Dubai will remain available and she will return at the end of the assignment. She tells colleagues she is “not moving permanently” to Australia, although she is open to future opportunities. Hillary hopes she can talk her Australian partner into moving with her back to Dubai.
From 7 June 2026, Hillary rents a furnished apartment in Sydney and moves some personal belongings to Australia. She opens an Australian bank account to receive her salary (paid from the UAE office) and to cover living expenses. Hillary obtains a local mobile phone plan and joins a professional networking group in Sydney. However, she keeps her main financial and personal ties in the UAE.
Hillary returns to the UAE for a short visit in December-January and ultimately leaves Australia on 7 April 2027, returning to her role in Dubai.
Hillary’s salary for various periods is set out in the following table:
Salary attributable to work performed during each period
AUD
1 July 2025 to 2 February 2026
$130,000
3 February 2026 to 31 May 2026
$75,000
1 June 2026 to 30 June 2026
$15,000
1 July 2026 to 7 April 2027
$170,000
8 April 2027 to 30 June 2027
$55,000
Advise Hillary whether she is an Australian tax resident, and if so, during which periods.
Advise Hillary on the amount of her salary that is included in her assessable income in Australia (if any) for the income years ending 30 June 2026 and 30 June 2027.
Consider the following additional facts (and ignore any PAYG withholding issues):
Hillary’s salary for the period from 1 June 2026 to 30 June 2026 was due to be paid to her by the firm on 30 June 2026 (by immediate electronic funds transfer), and would normally be assessable income to her at that time.
Hillary was experiencing cash flow difficulties in June 2026 due to the need to pay a four-week bond on her Sydney apartment. On 15 June 2026, Hillary requested that the firm pay part of her June salary in advance to meet immediate needs, namely:
$3,000 to discharge an outstanding amount owed to her serviced-accommodation provider for May 2026; and
$1,000 to her Australian partner to assist with urgent medical expenses.
The firm agreed and made these payments on 16 June 2026, treating them as advances against Hillary’s June 2026 salary.
On 28 June 2026, Hillary also asked if $4,000 of her June salary (due to be paid on 30 June 2026) could instead be paid on 5 July 2026 as she anticipated the AED/AUD exchange rate might be more favourable. The firm agreed.
Do these additional facts change the timing of when Hillary’s June 2026 salary is included in her assessable income? If so, how? Provide reasons to support your answer, including with reference to Brent v FCT 71 ATC 4195.
Would Hillary’s partner be assessable on the $1,000 payment? Why?