Edited version of private advice

Authorisation Number: 1051810229832

Date of advice: 19 March 2021

Ruling

Subject: Residency and CGT on sale of shares

Question 1

Are you a resident of Australia for taxation purposes?

Answer 1

Yes

Question 2

Will you have to pay capital gains tax on sale of foreign shares?

Answer 2

Yes

Question 3

How are the shares in foreign currency converted to Australian currency?

Answer 3

You will use translation rules as outlined in the reasons for decision.

Question 4

If you are considered an Australian resident based on the date of your defacto relationship with an Australian, will you be taken to have acquired your prior assets on that date, and will calculate capital gains on such assets from that date?

Answer 4

Yes, as your spouse is an Australian citizen all income as of 11 July 2018 will be taxable.

Question 5

If shares are in a foreign currency (e.g. USD) is unit conversion done before or after calculating the capital gains? e.g. (value(USD) - cost(USD))*rate, or value(USD)*rate - cost(USD)*rate.

Answer 5

Please see below explanation in 'Reasons for Decision'

This ruling applies for the following periods:

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

1 July 20XX - 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You advised that:

You are a XXXX resident and reside in Australia with a partner visa.

You will gain permanent residency in about XXXX years.

You moved to Australia in XXXX for your studies.

Between XXXX and XXXX, you bought shares in the form of ETF's domiciled on the XXXX Stock Exchange and held by a broker in XXXX.

According to your partner visa application, you officially entered a 'committed defacto relationship' on XXXX when you moved in together on the same lease.

You have resided in Australia continuously since XXXX, rarely leaving the country for more than X-X weeks to visit your family in XXXX.

You intend to sell your shares held in XXXX and reinvest it in Australia to keep it in an AUD-based ETF.

You are currently a student and have not derived any other income this year.

Relevant legislative provisions

Income Tax Assessment Act 1936, subsection 6(1)

Income Tax Assessment Act 1997, section 6-5

Income Tax Assessment Act 1997, section 995-1

Income Tax Assessment Act 1997, section 768-910

International Tax Agreements Act 1953

Detailed reasoning

Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for taxation purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

The terms 'resident' and 'resident of Australia', regarding an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

•                     the resides test,

•                     the domicile test,

•                     the 183-day test, and

•                     the superannuation test.

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. However, where an individual does not reside in Australia according to ordinary concepts, they may still be a resident of Australia for tax purposes if they meet the conditions of one of the other three tests.

Resides Test

When considering the resides test the following factors are normally considered:

•                     physical presence

•                     intention or purpose

•                     family or business ties

•                     maintenance and location of assets

•                     social and living arrangements.

In your case, you are a citizen of XXXX and moved to Australia in XXXX for your studies. You have resided in Australia fairly continuously since XXXX, rarely leaving the country for more than X-X weeks to visit your family in XXXX.

This subject is addressed in Taxation Ruling 98/17 (TR98/17) Income tax: residency status of individuals entering Australia. At paragraphs 20 and 21 it states:

20. All the facts and circumstances that describe an individual's behaviour in Australia are relevant. In particular, the following factors are useful in describing the quality and character of an individual's behaviour:

•                    intention or purpose of presence;

•                    family and business/employment ties;

•                    maintenance and location of assets; and

•                    social and living arrangements.

21. No single factor is necessarily decisive, and many are interrelated. The weight given to each factor varies depending on individual circumstances.

Your intention is to gain permanent residency in Australia.

You are presently on a partner visa application as you officially entered a 'committed defacto relationship' on XXXX and moved in together on the same lease. Therefore, you maintained a strong family tie with Australia even though you left to visit your family and friends overseas for X-X weeks.

You and your spouse maintain a joint lease on a rental property in Australia where you stay together. You have located all your personal belongings in Australia with your spouse.

You have established an abode in Australia where you stay in rental accommodation with your spouse.

You have established professional and social connections in Australia.

You are considered a resident for tax purposes under the resides test because -

•                     You are maintaining an enduring association with Australia via an abode in Australia which remains available to you

•                     You maintain strong family ties with your spouse in Australia

•                     You are there to support your Australian spouse as necessary

•                     You continue to jointly lease a residential rental property in Australia.

Your circumstances taken together lead to a conclusion that you are a resident under this test.

The Domicile Test

Under the domicile test, a person is a resident of Australia if their domicile is in Australia unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

Domicile

"Domicile" is a legal concept to be determined according to the Domicile Act 1982 and common law rules. A person's domicile is in their country of origin unless they acquire a different domicile of choice or operation of law. To obtain a different domicile of choice, a person must have the intention to make their home indefinitely in another country, usually done by obtaining a migration visa. The domicile of choice which a person has at any time continues until that person acquires a different domicile of choice.

Your domicile of origin is still XXXX, but you believe this will change within next XXXX years when you will attain your permanent residency in Australia based on your spouse visa application.

In your case, you are a citizen of XXXX. You have not been granted, but you are actively seeking permanent residency in Australia. This visa will allow you or to remain in Australia indefinitely.

Therefore, while you are not a permanent resident of Australia, the Commissioner considers you have established a permanent place of abode within Australia.

Permanent place of abode

A person's 'permanent place of abode' is a question of fact to be determined in the light of all the circumstances of each case. (Applegate v. Federal Commissioner of Taxation 78 ATC 4051; 8 ATR 372 (Applegate))

In Applegate, the court found that 'permanent' does not mean everlasting or forever, but it is to be contrasted with temporary or transitory.

The courts have considered 'place of abode' to refer to a person's residence, where he lives with his family and sleeps at night.

Taxation Ruling IT 2650 Income Tax: Residency - Permanent place of abode outside Australia (IT 2650) provides a number of factors which are used by the Commissioner in reaching a satisfaction as to an individual's permanent place of abode. These factors include:

(a) the intended and actual length of the individual's stay in the overseas country;

(b) any intention either to return to Australia at some definite point in time or to travel to another country;

(c) the intended and actual length of the individual's stay in the overseas country;

(d) any intention either to return to Australia at some definite point in time or to travel to another country;

(e) the establishment of a home outside Australia;

(f) the abandonment of any residence or place of abode the individual may have had in Australia;

(g) the duration and continuity of the individual's presence in the overseas country; and

(h) the durability of association that the individual has with a particular place in Australia, i.e. maintaining bank accounts in Australia, informing government departments, place of education of the taxpayer's children, family ties.

Paragraph 24 of IT 2650 states that the weight to be given to each factor will vary with individual circumstances of each case and no single factor is conclusive. Greater weight should be given to factors (c), (e) and (f) than to the remaining factors.

In your case it is considered that you have established a permanent place of abode in Australia as:

•                     You leased and live in a rental residential home in Australia, and it remains available to you.

•                     You have set up an established home with your spouse in Australia.

•                     You have not left Australia since you arrived in XXXX but, only to visit friends and family only for a period of X-X weeks and expect to continue with such visits in future years when you attain permanent residency with your spouse visa application.

•                     You intend living in Australia for a considerable and indeterminable time.

The duration and continuity of your presence in Australia supports the argument that you established a long-term place of abode in Australia. While you are a citizen of XXXX, this does not outweigh the enduring association and connection you have, and maintain, in Australia.

You have maintained a strong association with Australia through spouse relationship. Consequently, the Commissioner is not satisfied that you have a permanent place of abode outside Australia, and you are therefore a resident under the domicile test of residency.

The 183 days Test

Where a person is present in Australia for 183 days during the year of income the person will be a resident, 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.

You have been present in Australia for more than 183 days, therefore you are a resident for tax purposes under this test.

The superannuation Test

An individual is still considered to be a resident if that person is eligible to contribute to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS), or that person is the spouse or child under 16 of such a person.

You are not a contributing member of the PSS or the CSS or a spouse of such a person, or a child under 16 of such a person.

You are not a resident for tax purposes under this test.

Question 2

If you buy shares and later sell them the difference between the amounts is your capital gain or capital loss. Selling assets, such as shares or transferring them to someone else, triggers what's called a 'CGT event'. The CGT event marks the point in time at which you make a capital gain or incur a capital loss. If you are an Australian resident with overseas assets you need to include any capital gains or capital losses, you make on those assets in your tax return.

If you receive foreign income that is taxable in Australia and you paid foreign tax on that income, you may be entitled to an Australian foreign income tax offset.

Question 3

Converting foreign income to Australian dollars

You must convert all foreign income, deductions and foreign tax paid into Australian dollars for tax purposes.

There are two ways of doing this. Depending on your circumstances, you can use:

•                     the exchange rates prevailing at specific times -Translation (conversion) rules

•                     an average exchange rate - General information on average rates.

In your circumstances, as this is a one-time sale of the shares, you will use the translation rules.

The general translation rule applies to the translation of amounts of foreign income, expenses and other tax-relevant amounts to Australian dollars that applies from 1 July 2003. Under the general translation rule, all tax-relevant amounts that are denominated in a foreign currency must be translated into Australian currency. This enables all gains and losses from amounts on revenue account, capital account or otherwise to be calculated using the Australian dollar as a common unit of measurement.

The general translation rule applies regardless of whether the foreign income is remitted to Australia or not. You will need to translate to Australian dollars at the actual rate that applies/applied at the time of the relevant transaction or event.

Question 5

A foreign exchange gain or loss arises where an asset is denominated in a foreign currency, such as a loan or shares. Under specific rules, the cost base of an asset denominated in a foreign currency will be deemed to be the equivalent amount of Australian currency converted at the time of acquisition. Similarly, the disposal consideration in a foreign currency will be deemed to be the equivalent amount of Australian currency converted at the time of disposal. As the cost base and consideration are converted separately, there will not be a foreign exchange gain or loss recognised separately from the capital gain or loss arising from the asset disposal. Rather, this will be built into the overall gain or loss on the disposal of the asset.

The capital gains tax rules apply only to foreign exchange gains and losses which relate to assets. They do not apply to liabilities. Capital gains tax generally applies to all assets acquired (or deemed acquired) after 20 September 1985, other than trading stock, whether they are held on revenue or capital account.

Application to your circumstances

You have enrolled to study in Australia in a course that lasted more than six months, therefore you are regarded as an Australian resident for tax purposes and pay all tax on your earnings sourced from Australia at the same rate as other residents.

You were on a student visa until you officially entered a 'committed defacto relationship' on XXXX and obtained a partner visa. Both visas are classified as temporary visas and may provide a 'temporary resident exemption' to a person. While you are a temporary resident under section 995-1 of the ITAA 1997, you also have a spouse who is an Australian citizen.

Your spouse includes another person (of any sex) who:

•                     you were in a relationship with that was registered under a prescribed state or territory law

•                     although not legally married to you, lived with you on a genuine domestic basis in a relationship as a couple.

In your circumstances your spouse is an Australian citizen therefore, you will not be able to benefit from the exemptions. You will be required to pay all taxes including CGT on the sale of shares purchased after XXXX. Prior to this date all ordinary income you derive from a source other than an Australian source is non-assessable non-exempt income for Australian Income Tax purposes under section 768-910 of the ITAA 1997.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).