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Ruling

Subject: Residency for tax purposes and capital gains tax

Questions and answers

Are you a resident of Australia for tax purposes?

Yes.

Are you entitled to claim the main residence exemption upon the sale of your property in Australia?

Yes.

This ruling applies for the following periods:

Year ended 30 June 2008

The scheme commenced on:

1 July 2007

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.

Your country of origin in Country Z.

You are a citizen of Country Z, Country Y and Australia.

Australia is the most recent country you have become a citizen of.

After becoming an Australian citizen, you and your spouse jointly purchased a home in Australia.

You and your spouse sold this house in the year ended 30 June 2008.

You began working in Country X some years ago.

You had a five year employment contract which has since been extended.

You obtained a Country X residency visa.

You are unsure of your plans after your employment contract ends. You may return to either Australia or Country Z.

You have two weeks holiday every four months. During these holidays you either go to an Australian city to be with your family, or to Country Z to visit relatives.

You previously stayed at the house owned by you and your spouse when you were in Australia, until this house was sold.

Since the sale of your house, you stay with your relative when you are in Australia. Your spouse also lives with your relative.

You lease an apartment in Country X.

You have a bank account in Country X.

Your salary is paid into your Country X bank account.

In Australia you own a block of land and have a joint bank account with your spouse.

You transfer money into your Australian joint bank account to cover costs such as your mortgage.

No family members accompanied you to Country X.

You have no social or sporting connections in Australia.

You are a member of a sporting club in Country X.

Neither you, nor your spouse, have ever been a Commonwealth government employee.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1936 Subsection 6(1)

Reasons for decision

Residency for tax purposes

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 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 Income Tax: Residency - permanent place of abode outside Australia 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.

In the recent AAT case of Iyengar v FC of T [2011] AATA 856, the tribunal found that a taxpayer working in the Middle East for a number of years, only returning to Australia for short periods to see his spouse and children, was a resident of Australia for tax purposes under the resides test due to his family ties, his intention to complete his work contract, his motive to pay off his mortgage, and his maintaining an Australian place of abode while overseas.

In your case, you work, rent an apartment and maintain a bank account in Country X. However, your family, including your spouse and children, remain in Australia when you are in Country X. You own property and have a joint bank account with your spouse in Australia. You transfer money from your Country X bank account to your Australian bank account. You have a home to return to when you are in Australia, previously the property you owned jointly with your spouse, and more recently your relative's property, where your spouse also lives.

The facts of your case show that you have ties to both Country X and Australia, however, your ties to Australia are greater than those to Country X, as your purpose of being in Country X is for work, you have maintained your home in Australia and your immediate family have remained in Australia.

Therefore, you are a resident under the resides test.

As you are a resident under this test, it is not necessary to determine whether you meet the requirements of the other three tests of residency. However, for the sake of completeness, the other three tests will also be considered.

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.

In your case, your domicile of origin is Country Z, however, you acquired a domicile of choice in Australia when you immigrated to Australia with your family, became a citizen prior to 2005 and purchased a home in Australia with your spouse.

You did not abandon your domicile of choice of Australia and acquired a different domicile of choice, being Country X, upon moving there to work, as you were only in Country X to work, you maintained a home and other assets in Australia, your family remained in Australia, and you do not intend to move to Country X permanently or indefinitely.

Therefore, for the purposes of this test, your domicile is Australia.

Permanent place of abode

It is clear from the case law that a person's permanent place of abode cannot be ascertained by the application of any hard and fast rules. It is a question of fact to be determined in the light of all the circumstances of each case.

The courts have considered a person's 'place of abode' is where they consider 'home'. In R v Hammond (1982) ER 1477, Lord Campbell CJ stated that "a man's residence, where he lives with his family and sleeps at night, is always his place of abode in the full sense of that expression."

A place of abode must exhibit the attributes of a place of residence or a place to live, as contrasted with the overnight, weekly or monthly accommodation of a traveller.

Paragraph 23 of IT 2650 sets out the following factors which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode:

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 bank accounts 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.

In relation to the weight to be given to each of the above factors, paragraph 24 of IT 2650 states:

The weight to be given to each factor will vary with the individual circumstances of each particular case and no single factor will be decisive… however… greater weight should be given to factors (c), (e) and (f) than to the remaining factors, though these are still, of course, relevant.

In your case, the Commissioner is not satisfied that you have a permanent place of abode outside of Australia for the following reasons:

Your presence in Country X is for work purposes

You have a home in Australia

Your spouse and children remain in Australia when you are in Country X

You live with you spouse when you are physically present in Australia

You have maintained a bank account in Australia with you spouse

Therefore, you are a resident of Australia 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.

As you were not physically present in Australia for more than 183 days 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.

As neither you, nor your spouse, have ever been Commonwealth government employees and therefore you are not able to contribute to the abovementioned superannuation schemes and are not a resident of Australia under this test.

Your residency status

As you meet the resides test and the domicile test, you are a resident of Australia for tax purposes.

As you are a resident of Australia, according to section 6-5 of the ITAA 1997, your assessable income includes income gained from all sources, whether in or out of Australia.

Please note that Australia has not entered into a double tax agreement with Country X. You will need to contact the Country X tax authorities if you wish to determine what tax, if any, is payable by you in Country X.

Capital gains tax and the main residence exemption

Generally, an individual taxpayer can ignore a capital gain or capital loss from a CGT event that happens to his or her ownership interest in a dwelling that is his or her main residence.

To get the full exemption from CGT:

· the dwelling must have been the taxpayer's home for the whole period of ownership

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

· any land on which the dwelling is situated must be 2 hectares or less.

A taxpayer who does not meet all of the above criteria may still be entitled to a partial exemption if he or she meets all of the above criteria for only part of the ownership period.

In your case, you purchased a house with your spouse and lived in it as your home. Therefore, the main residence exemption applies and you can disregard any capital gain or capital loss you made when you sold the property.