Edited version of private advice

Authorisation Number: 1052010424096

Date of advice: 22 July 2022

Ruling

Subject: Tax residency status

Question

Are you Australian residents for income tax purposes?

Answer

No.

Question

Are you eligible for the main residence exemption for the property you sold?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You are Australian citizens.

You jointly own the property.

The property was purchased mid-20XX.

In late 20XX you had applied for a foreign resident withholding variation and you were offered an interim decision. As the property wasn't for sale the variation was withdrawn.

The contract date for the sale of the property was in mid-20XX and capital gain withholding of 12.5% was applied.

Settlement date was in late 20XX.

You left Australia and went overseas on mid-20XX. You have not returned to Australia since you left.

After you left, Person A had an accident that required emergency surgery. This resulted in you not being able to travel back to Australia.

In late 20XX Person B tripped on stairs at your accommodation and suffered a heavy fall and a back injury requiring hospital attention. Tests indicated a cracked spinal vertebrae and low bone density. While you were cleared to travel to Australia, you stayed for a follow-up hospital appointment.

You intended to return to Australia, but Person B contracted a Staph infection, the treatment of which became difficult and protracted.

Person B had an allergic reaction to penicillin and the anti-biotics being used for treatment. You attended the hospital on 3 occasions for emergency treatment of severe allergic reactions. The treatment extended into early 20XX. You were not able to plan a return to Australia until after this time.

You still reside in overseas due to the impact of COVID-19. The borders closed on mid-20XX and as a result of government policy, you were not able to have the COVID-19 vaccine that would enable you to travel when travel was allowed.

You are regularly monitoring the changing regulations and practices of airlines in order to determine when you will travel back to Australia. You have not found a suitable direct flight and are concerned about a flight with a connection given the changing circumstances as a result of COVID-19.

In the last six years you have frequently travelled overseas staying for multiple months at a time.

The property you sold is an apartment in a community complex. You sold it because you wanted to purchase a house on land.

When the property was sold you were overseas residing at a friend's property. You didn't have a formal lease. You made a verbal agreement with your friend and you had to give them one month's notice when you intended to leave.

You intend to reside permanently in Australia.

You are planning to purchase a property in which you will reside. This is subject to your budget that is impacted by the outcome of this ruling. That is why you have not yet purchased the property.

When you have established this residence, you anticipate that you will no longer travel overseas on a regular basis.

Person A held a Category B visa between that enabled them to work overseas, this was surrendered when Person A retired. Person A obtained a retirement visa. This is a 1-year visa that needs to be renewed each year.

You have no remuneration from either employment or business interests in Australia.

You have no remuneration from either employment or business interests overseas.

You have adult children and grandchildren in Australia.

You have the following Australian assets:

• Joint owners of your household effects that are currently in storage.
• 50% share each in a term deposit.
• Joint ownership of the apartment that was sold.
• Person A was the registered owner of a vehicle that was sold in late 20XX. The vehicle was sold due to depreciation in value, deterioration of the vehicle, and your prolonged absence.

You have the following overseas assets:

• 50% share each in a bank account
• 50% share each in an emergency bank
• Joint shareholder of an investment Life Settlement Fund
• Joint ownership of a beachside holiday condo apartment
• Joint owners of household effects
• Motor vehicle.

You describe your use of the property you own overseas as "frequent visitors".

You are not members of social groups in overseas.

You unenrolled to vote in Australia based on advice from the Australian Electoral Commission. You were given this advice because you do not have a current Australian address. A new enrolment application is in process.

Your property in Australia was billed for electricity up to mid-20XX.

Person A's Australian drivers licence expires mid-20XX.

Home insurance for the Australia property expired mid-20XX.

You are not Commonwealth of Australia employees for superannuation purposes.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 118-110

Income Tax Assessment Act 1997 subsection 118-110(3)

Income Tax Assessment Act 1997 section 995-1

Reasons for decision

Question 1

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

The terms 'resident' and 'resident of Australia', as applied to an individual, are defined in subsection 6(1) of the ITAA 1936.

The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are:

•         the resides test (also referred to as the ordinary concepts test)

•         the domicile test

•         the 183-day test, and

•         the Commonwealth superannuation fund test.

The resides test is the primary test for deciding the residency status of an individual. This test considers whether an individual resides in Australia according to the ordinary meaning of the word 'resides'.

Where an individual does not reside in Australia according to ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in Taxation Ruling IT 2650 Income tax: residency - permanent place of abode and Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia.

We have considered the statutory tests listed above in relation to your situation as follows:

Resides Test

The ordinary meaning of the word 'reside' 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': See Commissioner of Taxation v Miller (1946) 73 CLR 93 at 99 per Latham CJ, citing Viscount Cave LC in Levene v Inland Revenue Commissioners [1928] AC 217 at 222, citing the Oxford English Dictionary. Likewise, the Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

The observations contained in the case of Hafza v Director-General of Social Security (1985) 6 FCR 444 are also important:

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place - even involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248; and Keil v Keil [1947] VLR 383 - a person does not necessarily cease to be resident there because he or she is physically absent. The test is whether the person has retained a continuity of association with the place - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains "home": see Norman v Norman (No 3) (1969) 16 FLR 231 at 235... [W]here the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as "home", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

The Commissioner considers the following factors in relation to whether a taxpayer is a resident under the 'resides' test:

•         period of physical presence in Australia

•         intention or purpose of presence

•         behaviour while in Australia

•         family and business/employment ties

•         maintenance and location of assets

•         social and living arrangements.

It is important to note that no one single factor is decisive, and the weight given to each factor depends on each individual's circumstances.

Because the ordinary concepts test is whether an individual resides in Australia, the factors focus on the individual's connection to Australia. Having a connection with another country, or being a resident of another country, does not diminish any connection to Australia: Logan J in Pike v Commissioner of Taxation [2019] FCA 2185 at 57 reminds us that 'it is no part of the ordinary meaning of reside in the 1936 Act that there be a "principal" or even "usual" place of residence. ... It is important that ... "resident" not be construed and applied as if there were such adjectival qualifications.' For this reason, the test is not about dominance or exclusivity.

Application to your situation

We have taken the following into consideration when determining whether you meet the resides test:

•         You left Australia mid-20XX

•         You have not yet returned to Australia

•         You have spent approximately three years living overseas

•         You stay at a friend's property under a verbal agreement that requires notice of vacation

•         You sold your property in Australia in mid-20XX

•         You have chosen to stay overseas even though the borders have reopened, and you can now return to Australia

•         Your movements and habits were consistent with having a settled routine in overseas.

You are not a resident of Australia under the resides test for the relevant tax period.

You may still be an Australian resident if you meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund test).

Domicile Test

Under the domicile test, you are a resident of Australia if your domicile is in Australia unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

Domicile

Whether your domicile is in Australia is determined by the Domicile Act 1982 and the common law rules on domicile.

Your domicile is your domicile of origin (usually the domicile of your father at the time of your birth) unless you have a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and hold the positive intention to make that country your home indefinitely. Your domicile continues until you acquire a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

Application to your situation

In your case, you were born in Australia and your domicile of origin is Australia.

It is considered that you did not abandon your domicile of origin in Australia and acquire a domicile of choice. You were not entitled to reside overseas indefinitely and you only held a retirement visa which is renewed annually.

Therefore, your domicile is Australia.

Permanent place of abode

If you have an Australian domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place of abode is outside Australia. This is a question of fact to be determined in light of all the facts and circumstances of each case.

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

The phrase 'permanent place of abode' calls for a consideration of the physical surroundings in which you live, extending to a town or country. It does not extend to more than one country, or a region of the world.

The Full Federal Court in Harding v Commissioner of Taxation [2019] FCA 29 held at paragraphs 36 and 40 that key considerations in determining whether a taxpayer has their permanent place of abode outside Australia are:

•         whether the taxpayer has definitely abandoned, in a permanent way, living in Australia

•         whether the taxpayer is living in a town, city, region or country in a permanent way.

The Commissioner considers the following factors relevant to whether a taxpayer's permanent place of abode is outside Australia:

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

(b)  whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

(c)   whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

(d)  whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

(e)  the duration and continuity of the taxpayer's presence in the overseas country; and

(f)    the durability of association that the person has with a particular place in Australia, i.e. maintaining assets in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

As with the factors under the resides test, no one single factor is decisive, and the weight given to each factor depends on the individual circumstances.

Application to your situation

We have taken the following into consideration when deciding whether your permanent place of abode is outside Australia:

•         You were unable to return to Australia due to border closures

•         You have chosen to stay overseas even though the borders have reopened, and you can now return to Australia

•         You stay at a friend's property under a verbal agreement

•         You sold your property in Australia in mid-20XX

•         You sold your motor vehicle in Australia and maintain one overseas

•         Your movements and habits were consistent with having a settled routine in overseas.

Therefore, you are not a resident of Australia under the domicile test.

183-day test

Where a person is present in Australia for 183 days or more during the year of income the person will be a resident, unless the Commissioner is satisfied that both:

•         the person's usual place of abode is outside Australia, and

•         the person does not intend to take up residence in Australia.

Application to your situation

You have not been present in Australia for 183 days or more during the relevant income year. Therefore, you are not a resident under this test.

Superannuation Test

An individual is a resident of Australia if they are either 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 they are the spouse, or the child under 16, of such a person.

Application to your situation

You are not a member on behalf of whom contributions are being made to the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) or a spouse of such a person, or a child under 16 of such a person. Therefore, you are not a resident under this test.

Conclusion

As you do not satisfy any of the four tests of residency, you are not a resident of Australia for income tax purposes for the relevant income tax year.

Question 2

Main residence exemption

Section 118-110 of ITAA 1997 provides that you are eligible for the main residence exemption in relation to the disposal of a dwelling or your ownership interest in it if you are an individual and the dwelling was your main residence throughout your ownership period. However, foreign residents are not entitled to the main residence exemption unless they satisfy the requirements of the life events test.

If you sell your property for more than $750,000, at settlement, 12.5 per cent of the proceeds will be forwarded to the ATO on your behalf under the 'foreign resident CGT withholding regime', unless you provide a vendor variation certificate.

Application to your situation

In your case, you are a foreign resident and, based on the information you have provided, you will not meet the life events test. You will not be entitled to claim the main residence exemption for the property you sold whilst a foreign resident.

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