Edited version of private ruling

Authorisation Number: 1011697266424

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Ruling

Subject: Residency - residing overseas

Relevant facts

You are a citizen of Australia

Country X is your country of origin.

You left Australia in a particular year to take up a permanent position with your employer in their office in country A.

You have been issued an Employment Pass which does not require an entry visa when entering country A

You intend to reside overseas permanently.

You have visited Australia on a number of occasions for personal and business matters.

You reside permanently in a dwelling in country A.

You have a bank account in country A.

Prior to moving to country A you resided in a dwelling in Australia.

You do not have a permanent place to live in Australia.

You have a bank account in Australia which earns interest twice annually and you have superannuation.

You have an employment contract with your employer with no fixed expiry or termination date.

You pay tax on your employment income in country A.

Your adult child lives with you and is a country A resident.

Your spouse stayed in Australia while caring for your relatives. During this time your spouse returned to country A to be with you as circumstances permitted.

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

In country A you are a member of a social and sporting association. You are also a member of a commercial organisation that provides social and business networking.

You and your spouse have not been a Commonwealth Government of Australia employee.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1936 subsection 6(1)

Reasons for decision

Residency

 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', 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

· the superannuation test.

The first two tests are examined in detail in Taxation Ruling IT 2650.

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 meet the conditions of one of the other three tests.

The resides test

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3^rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having 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'.

You, your spouse and child are currently residing in country A as evidence by:

· a permanent place to live

· working full time and

· your stated intention to work in country A indefinitely

Therefore, you are not considered to be residing in Australia.

The domicile test

If a person is considered to have their domicile in Australia they will be considered an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.

In order to show that a new domicile of choice in a country outside Australia has been adopted, the person must be able to prove an intention to make his or her home indefinitely in that country.

The expression 'place of abode' refers to a person's residence, where they live with their family and sleep at night.  In essence, a person's place of abode is that person's dwelling place or the physical surroundings in which a person lives.

A permanent place of abode does not have to be 'everlasting' or 'forever'.  It does not mean an abode in which a person intends to live for the rest of his or her life.  An intention to return to Australia in the foreseeable future to live does not prevent the taxpayer in the meantime setting up a permanent place of abode elsewhere.

In your case,

· you have advised that it is your intention to make your home indefinitely in country A;

· your only tie to Australia is a bank account which earns interest,

· you are residing in country A with your spouse and child,

· you are working full time and

· you have created social ties in country A.

Therefore, you are not considered to have maintained your Australian domicile.

Based on these facts, the Commissioner is satisfied that you have established a permanent place of abode in country A.

The 183-day test

This test does not apply to you as it has been identified that your permanent place of abode is in country A.

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 will not be treated as a resident under this test as you are not a member of the PSS or the CSS, a spouse of such a person, or a child under 16 of such a person.

Your residency status

As you are not considered to be a resident of Australia under any of the tests of residency outlined in subsection 6(1) of the ITAA 1936, you are not considered to be an Australian resident from the date of your departure from Australia under subsection 995-1(1) of the ITAA 1997.

Part-year residency

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.

Capital gains tax (CGT) and ceasing to be an Australian resident

If a taxpayer ceases to be an Australian resident, a CGT event may be triggered. The relevant CGT event for an individual or company ceasing to be an Australian resident is CGT event I1.

If a taxpayer ceases to be an Australian resident, he or she is taken to have disposed of all of his or her assets (except those that are taxable Australian property):

· at the time the taxpayer ceases to be a resident, and

· for their market value at that time.

These provisions effectively crystallise any unrealised gains or losses the taxpayer has earned at the time the taxpayer stops being an Australian resident on assets that are leaving the Australian tax net, and subject them to Australian tax. This ensures that a taxpayer cannot avoid CGT on these unrealised gains when he or she ceases to be an Australian resident.

On the other hand, assets that are taxable Australian property remain subject to Australian tax after a taxpayer ceases to be an Australian resident. Consequently, there is no deemed disposal of such assets at the residence-change time.

CGT event I1 can place financial hardship on individual taxpayers, who have not physically disposed of an asset at the time the CGT event occurs, but who nevertheless have to fund a tax bill on the deemed disposal. It would be difficult for many individuals to fund this cost until they have actually disposed of the asset in question.

To alleviate this hardship, an individual taxpayer may choose to defer CGT event I1.

If a taxpayer makes this choice, the taxation of the unrealised capital gain or loss is only deferred. It is not permanently disregarded. The gain will be subject to tax when the taxpayer actually disposes of the relevant asset (and therefore have the funds to meet any tax liability).

Subsection 104-165(2) of the ITAA 1997 achieves this result by deeming the relevant asset to have the necessary connection with Australia until such time as another CGT event happens in relation to the asset or the taxpayer once again becomes an Australian resident (whichever occurs first).

Note

From the date you become a foreign resident any interest income will be subject to foreign resident withholding tax. As your interest income has its source in Australia, this income will be subject to tax in Australia under section 6-5(3) of the ITAA 1997. Therefore, you will need to lodge an income tax return in Australia to declare this income.

As you are considered to be a non-resident for Australian tax purposes from the day you left Australia you may be required to lodge an amended tax return for the 2007-8 income year. As you were an Australian resident for tax purposes until your Australian employment ceased, you will be eligible to a pro-rated tax-free threshold for the 2007/08 income year.