Edited version of private ruling

Authorisation Number: 1011679219743

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Ruling

Questions

1. Will you be a resident of Australia for tax purposes when you first come to Australia in the recent year?

Answer: No.

2. Will you be assessable on income derived from all sources in Australia and any other income that is included by a specific provision?

Answer: Yes.

3. Will you be assessable on ordinary income derived from sources outside Australia?

Answer: No.

4. Will you be assessable on statutory income that is sourced outside of Australia?

Answer: No.

5. When you settle in Australia, in the subsequent year, will you be a resident of Australia for tax purposes?

Answer: Yes.

6. Will you be regarded as a resident of Australia for the purpose of the Australia - Country B Double Tax Agreement (The Agreement) prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

7. Will you be assessable on foreign business income prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

8. Will you be assessable on foreign dividend income prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

9. Will you be assessable on foreign interest income prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

10. Will you be assessable on employment income derived from sources in Australia prior to your permanent settlement in Australia in the subsequent year?

Answer: Yes.

11. Will you be assessable on employment income derived from sources outside of Australia prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

12. Will you be assessable on 'other income' derived from sources in Australia prior to your permanent settlement in Australia in the subsequent year?

Answer: Yes.

13. Will you be assessable on 'other income' derived from sources outside of Australia prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

14. Will you be assessable on foreign discretionary trust income prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

15. Will you be assessable on foreign fixed trust income prior to your permanent settlement in Australia in the subsequent year?

Answer: No.

16. Will you be assessable on Australian sourced investment income prior to your permanent settlement in Australia in the subsequent year?

Answer: Yes.

17. Will you be able to disregard any capital gains or losses made on the disposal of assets that are not Australia's taxable property prior to your permanent settlement in Australia in the subsequent year?

Answer: Yes.

18. Will your capital gains or losses be calculated in reference to the cost base or reduced cost base being equal to the market value of your asset at the time you become a permanent resident, in the subsequent year?

Answer: Yes.

19. Will you be able to disregard any capital gains made on property acquired before 20 September 1985?

Answer: Yes.

20. Will the cost base of your interest(s) in a Country B fixed trust be the current market value of the interest(s) as at the date of commencing 'Australia' tax residency in the subsequent year?

Answer: Yes.

21. Will the cost base of your interest(s) in discretionary trust be the current market value of the interest(s) as at the date of commencing 'Australia' tax residency in the subsequent year?

Answer: Yes.

22. If you are not regarded as a foreign resident will capital gains that are made by the Country B fixed trust and discretionary trust be not assessable capital gains, in the subsequent year, in Australia when made by an overseas trustee?

Answer: Not applicable.

23. If you are not regarded as a foreign resident will the receipt of capital gains from the Country B fixed trust and discretionary trust, as part of the corpus of the said non Australia trusts be non assessable to Australia income tax?

Answer: Not applicable.

24. If you are not regarded as a foreign resident will capital gain(s) that are made by the Country B fixed trust and discretionary trust (non Australia) on assets acquired before 20 September 1985 and in which you become presently entitled form part of your 'net income'?

Answer: Not applicable.

25. If you are not regarded as a foreign resident will capital gain(s) that are made by the Country B fixed trust and discretionary trust (non Australia) on assets acquired on or after 20 September 1985 in which you become presently entitled be assessable income after you have permanently settled in Australia in the subsequent year?

Answer: Not applicable.

26. Will you need to show your foreign income in your tax return prior to settling permanently in Australia?

Answer: No.

27. Will you need to show your foreign income in your tax return after permanently settling in Australia?

Answer: Yes.

28. Will you be liable for tax at resident rates and be eligible for tax offsets prior to settling permanently in Australia?

Answer: No.

This ruling applies for the following period

1 July 2010 to 30 June 2012

Relevant facts and circumstances

You domicile is in Country C.

Your extended family live in Country C.

Your spouse is Australian.

Your spouse's extended family live in Australia.

In the particular year you will come to Australia from Country B with your family.

In the subsequent year your children will be attending school in Australia.

You are staying in Australia for several weeks and in the subsequent year you will settle the children into school.

In the subsequent year you will return to Country B to reorganise your business so you can operate it when you are permanently living in Australia.

As a result of reorganisation of your business you may receive payments such as dividends, profit distributions and other lump sums.

You will maintain your business assets, i.e. 50% shareholder in a Country B company and a member of a Country B trading limited liability partnership, and all your personal assets and investments while staying in Australia.

You do not have an employment contract in Australia.

Your spouse and children will remain in Australia when you return to Country B and will be living in a rented property.

You will come home to your family for a short holiday.

You will not do any professional work for your business in Country B while in Australia during your holidays, except for maintaining contact with your Country B office to ensure that its business is continuing and to address issues on a 'holding the fort' basis until you return in the subsequent year.

You personally own your home in Country B and in which most of your personal wealth is invested.

You will maintain the Country B home with its furnishings until your permanent arrival in Australia in the subsequent year.

You intend to market the Country B home for sale in the subsequent year.

You will move your financial affairs to Australia.

You do not have any social or sporting connections in Australia.

You do not have any personal or financial assets in Australia.

You intend to purchase a home in Australia once you sell your Country B home.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1936 Subsection 95(1)

Income Tax Assessment Act 1936 Subparagraph 97(1)(a)(i)

Income Tax Assessment Act 1997 Subsection 6-5(2)

Income Tax Assessment Act 1997 Subsection 6-5(3)

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-75(1)

Income Tax Assessment Act 1997 Subsection 104-75(2)

Income Tax Assessment Act 1997 Subsection 104- 75(3)

Income Tax Assessment Act 1997 Subsection 104-75(5)

Income Tax Assessment Act 1997 Subsection 104-75(6)

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Subsection 118-130(2)

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Subsection 118-145(4)

Income Tax Assessment Act 1997 Section 118-185

Income Tax Assessment Act 1997 Subsection 855-45(2)

International Tax Agreements Act 1953

Reason for decision

Residency

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 (or conversely, a foreign resident) for income tax purposes. These tests are the:

1. residence according to ordinary concepts test

2. domicile and permanent place of abode test

3. 183 day test, and

4. Commonwealth superannuation fund 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 considered to be a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

Residence according to ordinary concepts

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, is 'to dwell permanently or for a considerable time; having one's abode for a time'.

Taxation Ruling TR 98/17 considers the residency status of individuals entering Australia and states that the period of physical presence or length of time in Australia is not, by itself, decisive when determining whether an individual resides here. However, an individuals behaviour over the time spent in Australia may reflect a degree of continuity, routine or habit that is consistent with residing here.

You will not be considered to reside in Australia for the period between xx 2010 and late xx 2011 as your behaviour does not reflect the required degree of continuity, routine or habit that is consistent with residing here.

This is because:

· you will not seek employment in Australia,

· you will maintain your overseas licences, credit cards, bank accounts, insurances and postal address, and

· while you have some assets in Australia, the majority of your assets are in Country B.

You will be considered to reside in Australia from the time you intend to permanently settle in Australia late in the subsequent year as your behaviour will reflect the required degree of continuity, routine or habit that is consistent with residing here.

This is because:

· You intend to work your Country B business from Australia

· Your spouse and children have moved to Australia

· Your will be living with your family in a rented home in Australia

· You children will be attending Australian schools.

Domicile and permanent place of abode

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

Domicile is a legal concept to be determined according to the Domicile Act 1982 and to the common law rules which the courts have developed in the field of private international law. The primary common law rule is that a person acquires at birth a domicile of origin.

An Australian person retains their domicile of origin unless and until he or she acquires a domicile of choice in another country, or until he or she acquires another domicile by operation of law. 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.

You will maintain your home in Country B while you are in Australia for the relevant period and do not intend to make your home indefinitely in Australia until around late in the subsequent year. Consequently, the Commissioner is satisfied that you have a permanent place of abode outside Australia. Therefore, you do not qualify as an Australian resident under the domicile and permanent place of abode test.

The 183 day test

You will not be present in Australia for more than 183 days for the relevant period, you will not be considered to be a resident for tax purposes under this test as your usual place of abode will be considered to be outside Australia.

The Commonwealth superannuation fund test

This test is not relevant in your situation as it only applies to persons eligible to contribute to the superannuation funds for Commonwealth (Australian) government officers or their spouses or their children under the age of 16 years.

Conclusion

As you will not meet any of the tests of residency you will not be considered a resident of Australia for tax purposes for the relevant period.

However; from late in the subsequent relevant year you will be considered a resident of Australia for tax purposes.

Double Tax Agreement

The particular Schedule to the International Tax Agreements Act 1953 (the Agreements Act) contains the double tax agreement between Australia and Country B and Country C (the Country B Agreement). The Agreements Act contains the protocol amending the Country B Agreement (Country B Protocol). The Country B Agreement and the Country B Protocol operate to avoid the double taxation of income received by Australian and Country B residents.

The Country B Agreement deals with residence.

The (residency) status of an individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:

(a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;

if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

The Country B agreement also states;

(a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer.

As you will still have your house in Country B and will be maintaining it and living in it while in Country B working your business it is considered that you will be a resident of Country B under the relevant subsection of the Country B agreement for the relevant period.

From the subsequent year you will be permanently settled in Australia and living with your family in a rented property, therefore under the Country B Agreement, if you have a permanent home in both Australia and Country B, you would still be considered to be a resident of the Australia under the Country B Agreement because your personal and economic relations are closer to Australia than the Country B.

Therefore, it has been determined that for the purposes of the Double Tax Agreement, you are a Country B resident under the Country B Agreement for the relevant period.

From late in the subsequent year, it has been determined for the purposes of the Double Tax Agreement, you will be an Australian resident.

Assessability of income

Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

If you are a foreign resident, your assessable income includes:

a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

Accordingly you will be assessable on income derived from all sources inside Australia (and any other income that is included by a specific provision).

You will not be assessable in Australia on income derived from sources outside Australia, unless it is included in your assessable income under a specific provision.

This means your foreign business income, foreign dividend income, foreign interest income, and income derived from overseas trusts (including when the trustees dispose of assets and distribute the gains from the disposal to you) will not assessable in Australia for the relevant period.

Alternatively; subsection 6-5(2) of the ITAA 1997 states;

If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

Therefore your foreign dividend income, foreign interest income, and income derived from overseas trusts (including when the trustee dispose of assets and distribute the gains from the disposal to you) will be assessable from the subsequent year.

Capital Gains Tax

A capital gain or capital loss may arise if a capital gains tax event (CGT event) happens to a capital gains tax asset (CGT asset). Section 108-5 of the ITAA 1997 provides that a CGT asset is any kind of property.

Under section 104-10 of the ITAA 1997, the disposal of a CGT asset is a CGT event. You would make a capital gain if the capital proceeds from the disposal were more than the asset's cost base. You would make a capital loss if those capital proceeds were less than the asset's reduced cost base.

Generally you can disregard any capital gain or capital loss you make on an asset if you acquired it before 20 September 1985, pre-CGT.

Main Residence

Section 855-45 of the ITAA 1997 contains rules that apply to capital gains tax (CGT) assets (other than taxable Australian property) that are owned by individuals who later become Australian residents.

Specifically, subsections 855-45(2) and 855-45(3) of the ITAA 1997 provide that you are deemed to have acquired the property in Country B on the day that you became an Australian resident at its market value on that day.

Therefore, selling your property in Country B could potentially give rise to an assessable capital gain.

If this is the case you would make a capital gain if the capital proceeds from the sale (the price you sold the asset for) of the dwelling exceeded the market value at the time you became a resident (assuming no other amounts had subsequently been included in the dwelling's cost base).

A capital gain or capital loss you make from a CGT event that happens in relation to a dwelling is disregarded if you are an individual and the dwelling was your main residence throughout your ownership period (section 118-110 of the ITAA 1997).

When applying the main residence exemption regard is had to your 'ownership period' of a dwelling and the number of days during that period that the dwelling was your main residence. You are taken to have an ownership interest in land or a dwelling that you acquire under a contract from the time when you obtain legal ownership of it. Generally this happens when the contract is settled, unless the contract gives you a right to occupy the dwelling at an earlier time. (see subsection 118-130(2) of the ITAA 1997).

If you cease living in your main residence section 118-145 of the ITAA 1997 allows you to continue to choose to treat a property as your main residence from the time you stopped living in the dwelling to the time you ceased to own it. It provides that if you use 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 while you use it for that purpose is six years.

If the dwelling is not your main residence for the whole of the ownership period, section 118-185 of the ITAA 1997 provides that the assessable portion of the capital gain will be found by using the formula:

Non-main residence days

CG or CL amount x ---------------------------------------------

Days in your ownership period

where:

CG or CL amount is the capital gain or capital loss you would have made from the CGT event.

In your case the property will not have been your main residence throughout your ownership period because you will have moved to Australia.

However; you have stated you intend to rent a property in Australia and when you sell your Country B property you will then purchase a home in Australia. Under these circumstances you may elect to do one of the following;

Treat the dwelling as your main residence until you cease to own it, or

Use the dwelling that was your main residence for the purpose of producing assessable income for the maximum of six years.

If you choose one of the above, under subsection 118-145(4) of the ITAA 1997, when you make this choice you cannot treat another dwelling as your main residence for the same period.

Discretionary trusts

Absolute entitlement

The concept of absolute entitlement is discussed in draft Taxation Ruling TR 2004/D25.

To establish absolute entitlement the beneficiary's interest must be shown to be both vested in possession and indefeasible.

Paragraph 74 of TR 2004/D25 states that a vested interest is one that is bound to take effect in possession at some time and is not contingent upon an event occurring that may or may not take place. A beneficiary's interest in an asset is vested in possession if they have the right to immediate possession or enjoyment of it.

Paragraph 75 of TR 2004/D25 provides, in part, that the interest must not be able to be defeated by the actions of any person or the occurrence of any subsequent event.

In relation to discretionary trusts paragraph 71 states that because an object of a discretionary trust does not have an interest in the trust assets, they cannot be considered absolutely entitled to any of the trust assets prior to the exercise of the trustee's discretion in their favour.

Event E5

Subsection 855-45(2) of the ITAA 1997 states;

The first element of the cost base and reduced cost base of the asset (at the time you become an Australian resident) is its market value at that time.

In the case of a discretionary trust subsection 104-75(1) of the ITAA 1997 provides that CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee. Further, subsection 104-75(2) provides that the time of the event is when the beneficiary becomes absolutely entitled to the asset.

The effect of this E5 event is twofold. Firstly, under subsection 104-75(3) of the ITAA 1997 the trustee makes a capital gain if the market value of the asset (at the time of the event) is more than its cost base. Secondly, under subsection 104-75(5) of the ITAA 1997 the beneficiary makes a capital gain if the market value of the asset (at the time of the event) is more than the cost base of the beneficiary's interest in the trust capital to the extent it relates to the asset. Exceptions apply whereby any gains or losses made by either the trustee or the beneficiary will be disregarded if the CGT asset was acquired prior to 20 September 1985.

In the case of the beneficiary, subsection 104-75(6) of the ITAA 1997 also provides that a capital gain or capital loss the beneficiary makes is disregarded if the beneficiary acquired the CGT asset that is the interest (except by way of an assignment from another entity) for no expenditure.

If an E5 event happens to the trustee and the beneficiary is not under any legal disability, subparagraph 97(1)(a)(i) of the ITAA 1936 provides that where a beneficiary of a trust estate is presently entitled to a share of the income of the trust estate the assessable income of the beneficiary shall include so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident.

To this end, net income is defined under subsection 95(1) of the ITAA 1936. This subsection provides, in part, that in relation to a trust estate the net income includes the total assessable income of the trust estate. It follows that a capital gain arising as a result of an E5 CGT event would therefore constitute net income of the trust estate and be available to be distributed to the presently entitled adult beneficiaries.

How this applies to you

It will be a resolution or determination by the trustee to wind up the trust and distribute all assets to the beneficiaries which sees the beneficiaries become absolutely entitled to the assets of the trust as against the trustee. On this date the E5 CGT event will be triggered.

Prior to such a resolution or determination in their favour the discretionary nature of the trust will preclude absolute entitlement from passing to the beneficiaries, who under the terms of the Trust Deed will not have a vested and indefeasible interest in the assets of the trust.

The Trust Deed deals with the distribution of the trust capital and generally it would state that when a determination of the trustee in favour of a beneficiary becomes irrevocable, the beneficiary will have an immediate vested indefeasible interest in the capital the subject of such a determination.

When this resolution formally takes effect and an E5 CGT event is triggered, if the market value of the shares is greater than their cost base the operation of subsection 104-75(3) of the ITAA 1997 will be such that the trustee will make a capital gain. Likewise, subsection 104 -75(5) of the ITAA 1997 will operate to also allocate a capital gain to the relevant beneficiaries.

When the trustee makes the above mentioned resolution the relevant beneficiaries will then satisfy the requirements of subparagraph 97(1)(a)(i) of the ITAA 1936 in that they will be considered residents of Australia who are presently entitled to the assets of the trust and not under any legal disability.

It follows that whilst the trustee will initially make a capital gain in terms of subsection 104-75(3) of the ITAA 1997, subparagraph 97(1)(a)(i) of the ITAA 1936 will operate so that any capital gain associated with the transfer of the shares and subsequent E5 CGT event will be included in the assessable income of the beneficiaries.

In summary, if the market value of the asset is greater than their cost base on the date that the trustee makes the resolution to wind up the trust and distribute the assets, then the trustee will make a capital gain which will be distributed to the beneficiaries who will be required to return their share in the relevant year of income.

Income Tax Returns

The Commissioner may require certain persons to lodge an annual income tax return. Included are those foreign residents who derive income from Australian sources (other than dividend, interest and royalty income subject to withholding tax). However, if those foreign residents also derive from sources outside Australia they are not required to include this income (nor the details of the source of this income) in their income tax return.

As a foreign resident and working out of Country B, you will not need to lodge an Australian income tax return for income derived from sources outside and within Australia including foreign dividend, interest and trust income for the relevant period.

You will be required to lodge an Australian income tax return if you derive income from sources outside and within Australian after you have permanently settled in Australia, in the subsequent year, including foreign interest, dividends and trust income.

Tax Rates

Foreign residents are subject to non-resident tax rates on their Australian sourced income. Non-resident tax rates do not include any tax free threshold. Foreign residents are also generally not eligible to claim personal tax offsets in their income tax return but may be able to claim other tax offsets. Tax offsets were formally known as rebates.

As you are considered to be a foreign resident for tax purposes for the relevant period any Australian sourced income you may derive (if working in Australia) will be subject to tax at non-resident tax rates. These tax rates do not include a full or pro-rata tax free threshold. As a foreign resident, personal tax offsets also will generally not be available to you but you may still be able to claim other tax offsets.

However, from the time you become a permanent resident of Australia for tax purposes, the following rates apply:

Tax rates 2010-11