Edited version of private advice

Authorisation Number: 1051821675277

Date of advice: 30 March 2021

Ruling

Subject: Residency and employee share scheme interests

Question 1

Did you cease to be a tax resident of Australia following your relocation to Country X?

Answer

Yes

Question 2

Will any capital gain (or loss) made from the disposal of your shares which were granted under a qualifying 'start-up' employee share scheme be disregarded where you are a non-resident of Australia at the time you dispose of the shares?

Answer

Yes

This ruling applies for the following periods:

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are a citizen of Australia.

You relocated to Country X to live and work there on a permanent basis. You have no intention of returning to Australia to live.

Your spouse and child accompanied you to Country X.

You have a visa that allows you to live and work in Country X.

You ceased your Australian residential lease prior to leaving Australia.

You and your spouse will initially reside at the residence of your parents' spouse in Country X before purchasing your own property to live in.

You will continue to be employed by an Australian company following your relocation to Country X. You will carry out your duties exclusively from Country X.

Your salary will be paid into your Country X bank account.

You intend to make limited trips to Australia and spend limited time here following your relocation. You intend to spend 2-3 weeks in Australia each year to visit family.

You own shares in two Australian companies. You have no other assets in Australia apart from superannuation.

You are notifying your Australian bank that you will be living in Country X.

You have advised the Australian Electoral Roll that you will be residing in Country X.

You will inform Medicare that you will be residing in Country X.

You cancelled your Australian mobile number prior to your relocation to Country X.

You sold your motor vehicle prior to leaving Australia.

Your personal belongings will be shipped to Country X.

Neither you or your spouse has been a member a member of the Commonwealth Superannuation Scheme (CSS) or the Public Superannuation Scheme (PSS).

Over two years ago, while employed by your Australian employer, you were invited to participate in employee option plan (the Plan).

The Plan meets the ESS start-up concession conditions listed in subdivision 83A-B of the ITAA 1997.

Under the Plan, you were granted options in the company for nil consideration at an exercise price of $X per option. The options vest over a three year period.

You did not exercise any options and did not acquire any shares prior to relocating to Country X.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 section 104-165

Income Tax Assessment Act 1997 subsection 115-30(1)(9A)

Income Tax Assessment Act 1997 subsection 134-1(4)

Income Tax Assessment Act 1997 section 855-10

Reasons for decision

Residency for tax purposes

The terms 'resident' and 'resident of Australia', in regard to 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.

Only one of the tests needs to be met for an individual to be a resident of Australia for tax purposes.

The resides 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.

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 5^th edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; have one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), is 'to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place'.

In your case, you have relocated to another country with your family for an indefinite period of time and will establish a home in that country. You do not have accommodation available to you in Australia and will only make minimal return visits here.

Therefore, you are no longer residing in Australia and are not a resident of Australia under this test.

The domicile test

Under this test, a person is a resident of Australia for tax purposes if their domicile is in Australia, unless the Commissioner is satisfied that their permanent place of abode is outside of Australia.

Domicile

A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. A person may acquire a domicile of choice in another country if they have the intention of making their home indefinitely in that country (section 10 of the Domicile Act 1982). The intention needs to be demonstrated in a legal sense, for example, by way of becoming a citizen or permanent resident of the other country (along with other factors).

In your case, you are a citizen of Australia and there is not enough evidence available at the current time to say that you have, or will, acquire a domicile of choice in Country X. Therefore, it is considered that you still have an Australian domicile.

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. 'Permanent' does not mean everlasting or forever but it is to be distinguished from temporary or transitory.

In FC of T v Applegate (79 ATC 4307; (1979) 9 ATR 899), Fisher J described 'permanent place of abode' as being:

.....the taxpayer's fixed and habitual place of abode. It is his home, but not his permanent home. It connotes a more enduring relationship with the particular place of abode than that of a person who is ordinarily resident there or who has there his usual place of abode. Material factors for consideration will be the continuity or otherwise of the taxpayer's presence, the duration of his presence and the durability of his association with the particular place.

In your case, as mentioned above, you have relocated to another country with your family for an indefinite period of time and will establish a home in that country. You do not have accommodation available to you in Australia and will only make minimal return visits here.

Consequently, the Commissioner is satisfied that you will have a permanent place of abode outside of Australia and therefore, you will not be a resident of Australia under this test.

The 183 day test

Under the 183 day test, a person is a resident of Australia if they are actually physically present in Australia for 183 days or more in an income year unless the Commissioner is satisfied that their usual place of abode is outside of Australia and they have no intention of taking up residence here.

Although you spent more than 183 days in Australia during the current income year, the Commissioner is satisfied that from when you relocated to Country X, your usual place of abode is outside of Australia and you have no intention of taking up residence here again.

You will not be a resident under this test for any of the other relevant years as you will not be present in Australia for more than 183 days in any of those years.

The superannuation test

An individual is still considered to be a resident if that person is eligible to contribute to the Public Service 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 resident under this test.

Residency - conclusion

As you do not meet any of the residency tests, you are not a resident of Australia for taxation purposes.

Employee share scheme interests and ceasing tax residency

Generally, a discount you receive on shares, rights or stapled securities you acquire under an employee share scheme (ESS) is included in your assessable income when you acquire the beneficial interest in those shares, rights or securities.

However, subdivision 83A-B of the ITAA 1997 provides concessions for 'start-up' companies if certain conditions laid out in the subdivision are met.

Under the start-up rules, the discount on eligible ESS interests is not taxed under the ESS regime; instead, any gain or loss on disposal of the rights or shares is assessed under the capital gains tax regime.

When an ESS option is exercised, CGT event C2 occurs but may be disregarded under subsection 134-1(4) of the ITAA 1997 (subject to certain conditions).

When working out if the 50% CGT discount applies, the period of ownership of a share acquired on exercise of a right is taken to have started when the right was acquired (subsection 115-30(1)(9A) of the ITAA 1997).

In your case, you held options under the Plan when you ceased to be a tax resident of Australia.

CGT event I1 happens when a taxpayer stops being a tax resident of Australia. The taxpayer is required to work out if they have made a capital gain or a capital loss for each CGT asset owned just before the time of the event, ie for each asset owned just before the taxpayer ceased to be an Australian resident - apart from assets that are taxable Australian property (section 104-160 of the ITAA 1997).

However, an individual can choose to disregard making a capital gain or loss from the CGT assets covered by CGT event I1 (the choice can only be made for all assets owned). If he or she so chooses, each of those assets is taken to be taxable Australian property until the earlier of:

a)    a CGT event happening in relation to the asset, and

b)    the individual again becoming an Australian resident (section 104-165 of the ITAA 1997).

The choice is made when lodging the income tax return for the relevant income year.

Section 855-10 of the ITAA 1997 provides that a capital gain or loss from a CGT event is disregarded if you are a foreign resident just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not taxable Australian property.

Consequences for you of holding options when CGT event I1 happens

•         On ceasing tax residency, work out the amount of any capital gain or loss on the options

•         If the options are disposed of in the future (not exercised) when a non-resident, any capital gain or loss would be disregarded under section 855-10 of the ITAA 1997 as the options are not taxable Australian property

•         After the options are exercised and shares acquired, any capital gain or loss on the subsequent disposal of the shares while a non-resident is disregarded under section

•         855-10 of the ITAA 1997 as the shares are not taxable Australian property.

Consequences for you of holding options when CGT event I1 is disregarded

•         The options are taken to be taxable Australian property

•         If the options are subsequently disposed of (not exercised), any capital gain or loss cannot be disregarded as the options are taxable Australian property

•         If the options are exercised, CGT event C2 occurs but is disregarded under subsection 134-1(4) of the ITAA 1997

•         After the options are exercised and shares acquired, the shares are not taken to be taxable Australian property. Therefore, any capital gain or loss on the subsequent disposal of the shares while a non-resident is disregarded under section 855-10 of the ITAA 1997.

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