Edited version of private ruling

Authorisation Number: 1011660055153

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Ruling

Subject: Capital Gains Tax (CGT)

Issue 1

Question 1

Will you be an Australian resident for tax purposes when working overseas for a continuous period of 5 years?

Answer

No.

This ruling applies for the following periods:

01 July 2010 - 30 June 2011.

01 July 2011 - 30 June 2012.

01 July 2012 - 30 June 2013.

The scheme commences on:

1 July 2010

Issue 2

Question 1

Under the current section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997) is the main residence exemption available when you move overseas for work purposes for a period of 5 years?

Answer

Yes.

This ruling applies for the following periods:

01 July 2010 - 30 June 2011.

01 July 2011 - 30 June 2012.

01 July 2012 - 30 June 2013.

The scheme commences on:

1 July 2010.

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 have stated that you intend to:

· move with your spouse and children to another country for employment purposes for 5 years,

· return to Australia in a particular subsequent year,

· live in long term rental accommodation in the other country,

· not purchase a home in the other country,

· maintain your home in Australia, and

· rent out your home while you are away.

· You have stated that you have assets in Australia.

You have also stated that:

· you have not held a position with the Commonwealth Government of Australia.

· your spouse's father and mother reside in Australia.

· you have an extensive social network in Australia established through working and sporting activities.

· you are a permanent Australian resident since the 1990s.

· you are a citizen of the other country.

· you have a bank account in the other country.

· your whole family resides in the other country.

· you have an extensive social network in the other country.

· you are an individual taxpayer.

· the dwelling was your main residence throughout your period in Australia.

· the dwelling was also your spouses main residence for the period you were in Australia.

· the interest did not pass to you as a beneficiary or the trustee of the estate of a deceased person, and

· any land on which the dwelling is situated is two hectares or less.

Relevant legislative provisions

International Tax Agreements Act 1953

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 118-110

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 118-140

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Subsection 118-145(2)

Reasons for decision

Issue 1 Question 1

Summary

You advised you left Australia in the recent financial year. At that time you ceased to be a resident of Australia for tax purposes. For the financial years that you reside in the other country, if there are no changes in legislation you will be a resident of the other country for taxation purposes according to subsection 6(1) of the ITAA 1936. However, for the recent financial year you are entitled to a part-year threshold, up to the date that you left Australia according to section 6-5 of the ITAA 1997.

Furthermore, for the recent financial year all your Australian-sourced assessable income will be taxed according to resident rates and all your income earned in the other country will be taxed according to the other country's resident rates.

Detailed reasoning

Section 6-5 of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year and the assessable income of a foreign resident taxpayer includes ordinary income derived directly or indirectly from all Australian sources during the income year.

Residency status is a question of fact and is one of the main criteria that determines an individuals' liability to Australian income tax.

The term 'Australian resident' is defined in section 995-1 of the ITAA 1997 to mean 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' are defined in subsection 6(1) of the ITAA 1936:

resident or resident of Australia means:

(a) a person, other than a company, who resides in Australia and includes a person:

(i) whose domicile is in Australia, unless the Commissioner is satisfied that his permanent place of abode is outside Australia;

(ii) 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 his usual place of abode is outside Australia and that he does not intend to take up residence in Australia; or

(iii) who is:

(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or

(B) an eligible employee for the purposes of the Superannuation Act 1976; or

(C) the spouse, or a child under 16, of a person covered by sub-subparagraph (A) or (B); and

(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries on business in Australia, and has either its central management and control in Australia, or its voting power controlled by shareholders who are residents of Australia.

The above definition, in effect, provides four tests to ascertain whether an individual is a resident:

residence according to ordinary concepts;

· the domicile and permanent place of abode test;

· the 183 day test; or

· the Commonwealth superannuation fund test.

The Commissioner's view on issue of residency is outlined in Taxation Ruling IT 2650: Income Tax: Residency - permanent place of abode outside Australia. Paragraph 5 of IT 2650 says that the following factors need to be taken into account in order to determine the taxpayer's residence status:

(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 establishment a home outside Australia;

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

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

(f) the durability of association that the individual has with a particular place in Australia.

You have stated that you intend to:

· move with your spouse and children overseas for employment purposes for 5 years,

· return to Australia ,

· live in long term rental accommodation in the other country,

· not purchase a home in the other country,

· maintain your home in Australia, and

· rent out your home while you are away.

You have stated that you have assets in Australia and also that

· you have not held a position with the Commonwealth Government of Australia.

· your spouse's father and mother reside in Australia.

· you have an extensive social network in Australia established through working and sporting activities.

· you are a permanent Australian resident since the 1990s.

· you are a citizen of the other country.

· you have a bank account in the other country.

· your whole family resides in the other country.

· you have an extensive social network in the other country.

Residency status

You advised that you:

· are a permanent Australian resident,

· have owned a property in Australia for some years which you and your spouse have chosen to treat as your main residence,

· have assets in Australia, are married to a woman whose parents live in Australia, and

· have an extensive social network in Australia.

Therefore, you are considered to be a resident of Australia for tax purposes under subsection 6(1) of the ITAA 1936.

However, you have also advised that:

· you are a citizen of the other country,

· you have an extensive social network in the other country,

· you have an employment contract for a permanent job (although you intend to come back to Australia in a subsequent year),

· you hold a bank account in the other country, and

· you will be taking your family with you to the other country to live.

Therefore, you are also considered to be a resident of the other country for tax purposes.

Provision for dual residents

In order to determine the residency status for taxation purposes the international tax agreement between Australia and the other country needs to be considered. The International Tax Agreements Act 1953 (the Agreements Act) contains the double tax agreement between Australia and the other country (the Convention) and provision is contained in the Convention to prevent difficulties arising in the case of dual residents.

In the case of dual residents the place where the person has a permanent home is the determining factor. However, if he or she has a permanent home in both countries, or alternatively does not have a permanent home in either, the determining factor is the place of habitual abode. If he or she has such a place in both or in neither, the important factor is the personal and economic relations and the country with which these are the closer is deemed to be the place of residence.

The Convention provides that in determining an individual's permanent home, regard shall be given to the place where the individual dwells with their family, and in determining the country with which an individual's personal and economic relations are closer, regard shall be given to his or her citizenship (if the individual is a citizen of one of the countries).

However, you have also advised that:

· you are a citizen of the other country,

· you have an extensive social network in the other country,

· you have an employment contract for a permanent job (although you intend to come back to Australia in a subsequent year),

· you have a bank account in the other country, and

· you will be taking your family with you to the other country to live.

Therefore, you will be considered to be a resident of the other country for tax purposes from the date you left Australia in the recent financial year.

You advised you are a permanent Australian resident and were employed whilst in Australia. Therefore as:

· you are permanent Australian resident,

· have owned a property in Australia for some years which you and your spouse have chosen to treat as your main residence,

· you have assets in Australia,

· you are married to a spouse whose parents live in Australia, and

· have an extensive social network in Australia

You are considered to be an Australian resident for tax purposes for the period you were present in Australia in the recent financial year.

Income from rent

You advised that you intend to rent out your permanent residence in Australia for the full period that you are living and working in the other country. Real property is not defined in the relevant legislation and therefore the ordinary meaning of the term needs to be considered.

The Macquarie Dictionary (Version 5.0.0) defines 'real property' as:

1. tangible and immovable property such as land and houses, buildings or any such structures on the land, and any rights attached to the ownership of the land, such as mineral rights (but excluding leasehold interests).

Therefore your house is considered real property as per the ordinary meaning of the term according to the Macquarie Dictionary.

The Agreements Act addresses income from real property in the Convention.

Therefore, the income derived by you through your property in Australia will be subject to tax in Australia. You will need to include any income from rent as assessable income in an Australian income tax return and it will be subject to tax in Australia. For the recent financial year you will be taxed on resident rates for all Australian-sourced assessable income.

For the subsequent and future financial years while the same facts apply and there is no change in legislation you will be taxed on non-resident rates for all Australian-sourced assessable income.

Interest

Generally, the source of interest income will be the place where the interest is credited. If you derive interest from an Australian branch of any financial institution, then that interest will have an Australian source and be subject to Australian tax.

For the recent financial year you will be taxed on resident rates for all Australian-sourced assessable income.

For the subsequent and future financial years while the same facts apply and there is no change in legislation you will be taxed on non-resident rates for all Australian-sourced assessable income.

Part-Year Threshold

Where a taxpayer is a resident for only part of the year, their income will be taxed entirely at resident rates. In other words, a person is not required to pay tax at resident and non-resident rates in one income year. As a result, the following will apply to a part-year resident taxpayer:

· the foreign source income received by that person during the non-resident period is not assessable in Australia, and

· the tax-free threshold will be apportioned based on the number of months in the income year that the person was a resident.

In relation to the subsequent financial year, you were still living in Australia until the date you left as a permanent resident, therefore you are entitled to the tax free threshold for that financial year for the period that you were in Australia.

Conclusion

You advised you left Australia during the recent financial year and at that time you ceased to be a resident of Australia for tax purposes and for the financial years that you reside in the other country and there are no changes in legislation you will be a resident of the other country for taxation purposes according to subsection 6(1) of the ITAA 1936. However, for the recent financial year you are entitled to a part-year threshold, up to the date that you left Australia according to section 6-5 of the ITAA 1997.

Furthermore, for the recent financial year all your Australian-sourced assessable income will be taxed according to resident rates and all your income earned in the other country will be taxed according to the other country's resident rates.

Issue 2 Question 1

Summary

According to the Capital gains tax guide 2009-10, in some cases you can choose to continue to treat a dwelling as your main residence during periods of absence or if you cease to reside in the dwelling.

If you cease to reside in your main residence the exemption will apply for six years regardless of where you choose to reside.

Once you have made this choice, no other dwelling can be treated as your main residence except where you acquire a new home in Australia before you dispose of your existing home and both dwellings can be treated as the main residence for six months ending when the ownership interest in the existing main residence ends according to section 118-140 of the ITAA 1997.

You must make the choice by the day you lodge your tax return for the income year in which a CGT event happens, such as selling the house.

If you make a choice, it is not affected by you becoming a foreign resident during the period of absence however this does not take into account possible future legislative changes.

Detailed reasoning

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (see section 102-20 of the ITAA 1997). CGT event A1 will happen when you sell your ownership interest in a property (see section 104-10 of the ITAA 1997).

Section 118-145 of the ITAA 1997 is concerned with the main residence exemption where if a taxpayer leaves his or her main residence he or she can continue to treat it as his or her main residence in certain circumstances.

Specifically, subsection 118-145(2) of the ITAA 1997 states:

If you use the part of the *dwelling that was your main residence for the *purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is 6 years. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence.

A foreign resident is subject to Australian CGT rules if they sell an asset that has the necessary connection with Australia. Land or a building in Australia (or an interest in land or a building) is considered to be an asset with the necessary connection with Australia.

Residency status

You advised that you

· are a permanent Australian resident,

· have owned a property in Australia for some years which you and your spouse have chosen to treat as your main residence,

· have assets in Australia, are married to a spouse whose parents live in Australia, and

· have an extensive social network in Australia.

Therefore, you are considered to be a resident of Australia for tax purposes under subsection 6(1) of the ITAA 1936.

However, you have also advised that you:

· are a citizen of the other country,

· have an extensive social network in the other country,

· an employment contract for a permanent job (although you intend to come back to Australia in a particular subsequent year),

· have a bank account in the other country, and

· will be taking your family with you to the other country to live.

Therefore, you are also considered to be a resident of the other country for tax purposes.

Provision for dual residents

In order to determine the residency status for taxation purposes the international tax agreement between Australia and the other country needs to be considered. The Agreements Act contains the double tax agreement between Australia and the other country (the Convention) and provision is contained in the Convention to prevent difficulties arising in the case of dual residents.

The Convention provides that in determining an individual's permanent home, regard shall be given to the place where the individual dwells with their family, and in determining the country with which an individual's personal and economic relations are closer, regard shall be given to his or her citizenship (if the individual is a citizen of one of the countries).

As previously stated you are considered to be a resident of Australia for tax purposes under subsection 6(1) of the ITAA 1936.

However, you have also advised that you:

· are a citizen of the other country,

· have an extensive social network in the other country,

· have an employment contract for a permanent job (although you intend to come back to Australia in a particular subsequent year),

· have a bank account in the other country, and

· will be taking your family with you to the other country to live.

Therefore, you will be considered to be a resident of the other country for tax purposes from the date you left Australia in the recent financial year.

Capital gains tax

The Commissioner's view on CGT is set out in the Guide to capital gains tax 2009-10 (the Guide).

The Guide advises that a foreign resident is subject to Australian CGT rules if they sell an asset that has the necessary connection with Australia. Land or a building in Australia (or an interest in land or a building) is considered to be an asset with the necessary connection with Australia.

You make a capital gain or capital loss as a result of a CGT event happening.

The most common event (CGT event A1) happens if you dispose of a CGT asset to someone else. In this situation, CGT event A1 will happen on the sale of your property.

However, as a general rule, you can disregard any capital gain or capital loss realised on the disposal of your interest in your main residence.

Main residence exemption

The main residence exemption is provided by section 118-110 of the ITAA 1997. In order for the main residence exemption to apply the following conditions must be satisfied:

· you are an individual taxpayer,

· the dwelling was your main residence throughout your ownership period,

· where you are married and your ownership interest exceeds 50 percent% - the dwelling must also be your spouse's main residence for the whole period you owned it, and

· the interest did not pass to you as a beneficiary or the trustee of the estate of a deceased person.

Additionally, to obtain the full exemption from CGT:

· the dwelling must not have been used to produce assessable income, and

· any land on which the dwelling is situated must be two hectares or less.

Application

You have advised that you:

· are an individual taxpayer,

· the dwelling was your main residence throughout your period in Australia,

· the dwelling was also your spouses main residence for the period you were in Australia,

· the interest did not pass to you as a beneficiary or the trustee of the estate of a deceased person, and

· any land on which the dwelling is situated is two hectares or less.

However, you have advised that the dwelling will be used to produce assessable income.

According to subsection 118-145(2) of the ITAA 1997 if the dwelling is used to produce income the maximum period that you can choose to treat it as your main residence, while you use it for that purpose, is six years.

Conclusion

According to the Guide, in some cases you can choose to continue to treat a dwelling as your main residence during periods of absence or if you cease to reside in the dwelling.

If you cease to reside in your main residence the exemption will apply for six years regardless of where you choose to reside.

Once you have made this choice, no other dwelling can be treated as your main residence except where you acquire a new home in Australia before you dispose of your existing home and both dwellings can be treated as the main residence for six months ending when the ownership interest in the existing main residence ends according to section 118-140 of the ITAA 1997.

You must make the choice by the day you lodge your tax return for the income year in which a CGT event happens, such as selling the house.

If you make a choice, it is not affected by you becoming a foreign resident during the period of absence, however this does not take into account possible future legislative changes.