Edited version of private ruling

Authorisation Number: 1011771755546

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Ruling

Subject: Residency for taxation purposes

Questions and answers:

1) Are you a resident of Australia for tax purposes?

No.

2) Are you entitled to a partial tax-free threshold?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2010

Year ending 30 June 2011

The scheme commenced on:

1 July 2009

Relevant facts:

You are a citizen of Country Y.

You moved to Australia to work from 2004 to 2010.

You moved to Country X in early 2010 to take up an employment contract that specified a duration of several months, with an option to renew.

Your contract has since been extended and you intend to continue extending it as far as possible because you enjoy living in Country X.

Your partner moved to Country X with you and you have since married.

Your accommodation in Country X has included a hotel initially, a furnished apartment and currently an unfurnished apartment on a one year lease.

You and your spouse have developed considerable community and sporting commitments during your time in Country X.

You and your spouse both have investment properties in Australia.

Since leaving Australia, you have only returned once for a short business trip.

Your domicile is not Australia.

Neither you or your spouse are or ever have been Commonwealth of Australia employees.

You have left Australia indefinitely and have no firm intention of returning to Australia to live in the future.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1936 Subsection 6(1)

Reasons for decision

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, and

· the superannuation test.

The first two tests are examined in detail in Taxation Ruling IT 2650 Income Tax: Residency - Permanent place of abode outside Australia.

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'.

Although the question of whether a person resides in a particular country is a question of fact, the courts have referred to and taken into account various factors considered to be relevant. These are:

· whether the person is physically present in that country at some time during the year of income

· the history of the person's residence and movements

· if the person is a visitor to the country, the frequency, regularity, duration and purpose of the visits

· if the person is outside the country for part of the relevant income year, the purpose of the absences

· the family and business ties which the person has with the particular country, and

· whether a place of abode is maintained by the person in the relevant country or is available for his or her use while there.

Taxation Ruling IT 2650 emphasises the intended and actual length of the individual's stay in an overseas country, any intention to return to Australia or travel elsewhere, the establishment or abandonment of any residence, and the durability of association that the individual maintains with a particular place in Australia as the main factors to be considered when determining the residency status of individuals leaving Australia.

Application to the facts of the case

In your case, you are not considered to have been residing in Australia since your departure in 2010. You have established a place of abode in Country X with your spouse. You have not maintained a home in Australia and do not have family ties in Australia. You have no firm intention of returning to Australia to live and intend to stay in Country X for as long as possible. You have only returned to Australia once briefly for business.

Therefore, you 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

Domicile is a legal concept, determined according to the Domicile Act 1982 and common law rules established by private international law cases.

Domicile is the place that is considered by law to be your permanent home. It is usually something more than a place of residence.

Application to the facts of the case

Your domicile is Country Y because you are a citizen of Country Y. When you moved to Australia you retained Country Y as your domicile and did not adopt Australia as your domicile of choice.

Therefore, since your domicile is not Australia, you are not a resident 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 more than 183 days in an income year unless the Commissioner is satisfied that their usual permanent of abode is outside of Australia and they have no intention of taking up residence here.

Application to the facts of the case

In your case you will not be physically present in Australia for more than 183 days in any financial year after your departure.

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

The superannuation test

A person will be considered a resident under the Commonwealth superannuation fund test if they currently contribute to certain superannuation funds for Commonwealth government employees. The eligible funds are funds:

· established under the Superannuation Act 1976 (such as the Commonwealth Superannuation Scheme), or

· established under the Superannuation Act 1990 (such as the Public Sector Superannuation Scheme), or

· the spouse or child under 16 of a person covered by either of the above funds.

Application to the facts of the case

In your case, neither you, nor your spouse, have ever been Commonwealth government employees and therefore you are not able to contribute to the abovementioned superannuation schemes.

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

Your residency status

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

As you are not a resident of Australia, according to section 6-5 of the ITAA 1997, your assessable income only includes income gained from sources in Australia.

In your case, your assessable income in Australia will include the rental income from your investment properties.

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.

Therefore, in your case, you departed from Australia in 2010 and ceased to be a resident at that time. You were a resident of Australia for X months in the income year ending 30 June 2010. As such, your tax-free threshold will be reduced to the pro-rata equivalent of $Y for the X months you were an Australian resident.

Further information

Tax treaty between Australia and Country X

Australia and Country X currently have an agreement in place to avoid double taxation and to prevent fiscal evasion with respect to taxes on income. More information regarding this agreement is available on our website www.ato.gov.au .

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).