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Ruling

Subject: Overseas tax status and main residence exemption.

Question 1

Under the current section 118-145 of the Income Tax Assessment Act 1997 is the main residence exemption available if you sell your house in Australia during the financial year ended 30 June 2014?

Answer

Yes.

This ruling applies for the following periods:

01 July 2013 - 30 June 2014.

The scheme commences on:

1 July 2010.

Relevant facts and circumstances

You have stated that you intend to:

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

· return to Australia by late 2015,

· 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 stated that:

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

· your spouses parents reside in Australia.

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

· you are a permanent Australian resident since 199X.

· 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 Schedule 18,

International Tax Agreements Act 1953 Paragraph 6(1),

International Tax Agreements Act 1953 Paragraph 6(2),

International Tax Agreements Act 1953 Article 3,

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, and

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

Reasons for decision

You make a capital gain or capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset (section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997)). CGT event A1 will happen when you sell your ownership interest in a property (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 since late 2006 which you and your spouse have chosen to treat as your main residence,

· have assets in Australia, are married to your 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 Income Tax Assessment Act 1936 (ITAA 1936).

However, you have also advised that you:

· are a citizen of another 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 by late 2015),

· have a bank account in the other country, and

· are living with your family in the other country.

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

Provision for dual residents

Article 3 of the International Tax Agreements Act 1953 (the Agreements Act) provides that if an individual is a resident of both Australia and the other country, the individual shall be deemed to be a resident of the country:

(3)  

Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States, then his status shall be determined in accordance with the following rules:

(a) he shall be deemed to be a resident solely of the Contracting State in which he has a permanent home available to him;

(b) if he has a permanent home available to him in both Contracting States, or if he does not have a permanent home available to him in either of them, he shall be deemed to be a resident solely of the Contracting State in which he has an habitual abode;

(c) if he has an habitual abode in both Contracting States, or if he does not have an habitual abode in either of them, he shall be deemed to be a resident solely of the Contracting State with which his personal and economic relations are the closer.

As above Article 3 of 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 another 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 by late 2015),

· have a bank account in the other country, and

· are living with your family in the other country.

Therefore, you will be considered to be a resident of the other country for tax purposes from late 2010.

Capital gains tax

The Commissioner's view on CGT is set out in the Guide to capital gains tax 2011-12 (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% - the dwelling must also be your spouses 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.