Edited version of your written advice

Authorisation Number: 1012762209894

Ruling

Subject: Residency and capital gains tax

Questions and answers:

1. Did you cease to be a resident of Australia for taxation purposes on dd/mm/yyyy?

Yes.

2. Were you a non resident of Australia for the period 1 July 2013 until 30 June 2014.

Yes.

3. Are you entitled to disregard any gain made on the disposal of your shares in an Australian incorporated company in the financial year ended 30 June 2014?

Yes.

This ruling applies for the following period:

1 July 20XX to 30 June 2014

The scheme commenced on:

1 July 20XX.

Relevant facts and circumstances:

You were born in Country A.

Your domicile of origin is Country A.

You are not an Australian citizen.

You came to Australia with your family about X years ago.

You applied for and were granted Australian permanent residency status several years ago.

You and your family returned to Country A.

You are a resident of Country A for taxation purposes.

You have no intention of returning to live in Australia.

You were not present in Australia for more than 183 days in the period 1 July 2013 to 30 June 2014.

Neither you nor your spouse have ever been members of the Commonwealth superannuation funds established under the Superannuation Act 1976 or the Superannuation Act 1990.

When you left Australia all your personal belongings were either relocated back to Country A, sold, or placed in storage. You intend to ship the belongings in storage back to Country A. You also:

• sold your Australian home,

• disposed of your motor vehicles,

• closed your Australian superannuation fund,

• cancelled your Australian credit cards,

• cancelled your Australian private health insurance,

• cancelled all Australian professional associations and memberships, and

• closed your Australian bank accounts.

When you left Australia you owned shares in an Australian company (your shares).

You disposed of your shares in the financial year ended 30 June 2014.

When you left Australia you made the choice available under section 104-165 of the Income Tax Assessment Act 1997 (ITAA 1997) to disregarded any gain or loss made from the 'deemed disposal' of your shares because of CGT event I1.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 995-1(1).

Income Tax Assessment Act 1936 Section 6(1).

Income Tax Assessment Act 1997 Division 102.

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 104-165

Income Tax Assessment Act 1997 Section 108-5.

Income Tax Assessment Act 1997 Section 855-15.

Reasons for decision

Residency for taxation purposes

Section 995-1 of the Income tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for tax purposes as a person who is a resident of Australia for the purposes of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms 'resident' and 'resident of Australia', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. The tests are:

• the resides test,

• the domicile (and permanent place of abode) test,

• the 183 day test, and

• the superannuation test.

If any one of these tests is met, an individual will be a resident of Australia for taxation purposes.

The resides test is the primary test for determining the residency status of an individual for taxation purposes. If residency is established under the resides test, the remaining three tests do not need to be considered. However, if residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests.

The resides test

The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes it's ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936.

In Dempsey and Commissioner of Taxation [2014] AATA 335 (29 May 2014) the Administrative Appeals Tribunal noted that the settled position of the courts (at ultimate appellant level) as to the meaning of the word 'resides' in the ITAA 1936 is that the word:

bears its ordinary English meaning, which 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".

Based on the facts of your case, the Commissioner accepts that you have not resided in Australia according to the ordinary meaning of the word since you left Australia.

The domicile test

Under this test, a person who has an Australian domicile will be considered a resident of Australia for taxation purposes unless the Commissioner is satisfied the person's permanent place of abode is outside Australia.

A person's domicile is generally their country of birth. This is known as a person's 'domicile of origin'. A person's domicile of origin will not usually change, but can in some circumstances. For example, a person can acquire a domicile in another country by choice.

In order to acquire a new domicile by choice, a person must have an intention to make their home indefinitely in a country outside their domicile of origin. Sufficient proof of such an intention is considered to exist in cases where a person is granted permanent residency, or becomes a citizen of a country outside of their domicile of origin.

Your domicile of origin was Country A but we consider you obtained a domicile of choice in Australia when you sought and were granted permanent residency status for Australia. Accordingly, you will be a resident of Australia under this test unless the Commissioner is satisfied you have a permanent place of abode outside Australia.

Taxation Ruling IT 2650 - Income tax: residency - permanent place of abode outside Australia specifies that a 'permanent place of abode' does not have to be everlasting or forever and does not mean an abode in which a person intends to live for the rest of their lives. In essence, Taxation Ruling IT 2650, specifies that a person's place of abode is where they live and is a question of fact to be determined in the light of all the factors a particular case

Based on the facts you have provided, the Commissioner is satisfied that after leaving Australia you established a permanent place of abode in Country A. Accordingly, you have not been a resident of Australia under this test from the time you left Australia.

The 183-day test

Under this test, a person who is in Australia for 183 days (not necessarily consecutively) during an income year may be considered a resident of Australia for taxation purposes, unless the Commissioner is satisfied the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia.

You were not in Australia for more than 183 days in the period 1 July 2013 to 30 June 2014 and therefore will not be a resident of Australia for taxation purposes under this test for that period.

Because you have stated you remained a resident of Australia for taxation purposes up until the time you returned to Country A, the application of this test to your circumstances has not been considered in respect of the financial year ended 30 June 2013.

The superannuation test

You have stated neither you nor your spouse have ever been members of the Commonwealth superannuation funds established under the Superannuation Act 1976 or the Superannuation Act 1990. Accordingly, this test does not apply to you.

Conclusion - your residency status

Based on the facts you have provided, you ceased to be a resident of Australia for taxation purposes between the time you left Australia in 2013 and 30 June 2014.

Capital gains tax, ceasing to be a resident and CGT event I1

Under the provisions of Australia's taxation law, you can only make a capital gain or loss if a CGT event happens to a CGT asset you own.

The most common event that can happen to a CGT asset is CGT event A1 which happens when you dispose of a CGT asset to another person or entity. However, there are many other events that can take place that may also trigger a CGT event.

Shares are CGT assets.

As a general rule, individuals who are residents of Australia are required to include in their assessable income any assessable gain or loss made from the disposal of any CGT asset. Foreign residents however are only required to include in their Australian assessable income any gain or loss made as a result of a CGT event happening to a CGT asset they own that is classified as 'taxable Australian property' under the CGT provisions.

Shares are not usually considered to be 'taxable Australian property' even though they are a CGT asset. However, shares may be taken to be 'taxable Australian property' in some cases when an individual ceases to be an Australian resident for taxation purposes.

When you cease to be an Australian resident for taxation purposes you are taken to have disposed of your CGT assets for their market value at the time you cease being a resident. This is known as CGT event I1 and will result in a capital gain or loss, depending on whether or not the market value of the CGT assets at the time is greater or less than the cost base/reduced cost base of those assets.

Normally, any gain or loss that results from CGT event I1 happening would be included in your Australian assessable income in the financial year you cease being a resident of Australia for taxation purposes. However, section 104-165 of the ITAA 1997 allows you to make a choice to disregard (and therefore exclude from your assessable income) any gain or loss made from the deemed disposal of CGT assets because of CGT event I1 happening at the time you cease being a resident. Subsection 104-165(3) of the ITAA 1997 provides that any assets for which you make this choice are thereafter taken to be 'taxable Australian property' until the earlier of:

• a CGT event happening to the assets (for example, their subsequent sale or disposal), or

• you again becoming an Australian resident.

CGT event I1 happened to your shares when you ceased being a resident of Australia for taxation purposes. This means you were deemed to have disposed of those shares for their market value on that date and a capital gain or loss would have resulted, depending on whether or not the market value of the shares was greater or lesser than the cost base/reduced cost base of the shares.

At the time you ceased being a resident you made the choice available to you under section 104-165 of the ITAA 1997 to disregard any gain or loss made from the deemed disposal of your shares because of CGT event I1. As a consequence, your shares became 'taxable Australian property' and would remain so until the earlier of another CGT event happening to them, or you again becoming an Australian resident for taxation purposes.

Another CGT event (CGT event A1) happened to your shares during the financial year ended 30 June 2014 when you disposed of your shares.

As stated previously, we consider that you were not a resident of Australia for taxation purposes during the financial year ended 30 June 2014.

As a foreign resident (and because the choice you made under section 104-165 of the ITAA 1997 resulted in your shares being considered 'taxable Australian property' at the time you disposed of them) you would generally be required to include any assessable gain or loss from the disposal of your shares in your Australian assessable income for the year ended 30 June 2014.

The impact of the double tax agreement between Australia and Country A on the assessability of gains made from the disposal of CGT assets that are 'taxable Australian property' by a non -resident of Australia when those assets have been the subject of a choice made under section 104-165 of the ITAA 1997

Australia and Country A are parties to a double tax agreement (the DTA).

One of the aims of the DTA is to prevent double taxation of individuals who may, but for the agreement, have a taxation liability in both countries for the same reason.

Article 13 of the DTA deals with the alienation (disposal) of property. Shares are considered to be property for the purposes of Article 13.

Paragraph 5 of Article 13 states:

An individual who elects, under the taxation law of a Contracting State, to defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State, be taxable on income or gains from the subsequent alienation of that property only in that other State.

By making the choice you did under section 104-165 of the ITAA 1997 you effectively deferred taxation on any gain from the deemed disposal of your shares at the time you ceased being a resident of Australia. Although any assessable gain or loss from the subsequent disposal of those shares in the financial year ended 30 June 2014 would normally have been included in your assessable income in Australia, the provisions of paragraph 5 of Article 13 of the DTA make it clear that you are only assessable in Country A on any gain from that disposal.

Conclusion

You were a non-resident of Australia between dd/mm/yyyy and 30 June 2014.

Any gain or loss made from the disposal of your shares in the financial year ended 30 June 2014 is not included in your assessable income in Australia.