Edited version of private advice

Authorisation Number: 1012797734295

Ruling

Subject: International issues - residency - Capital gain made by a foreign resident

Question 1

Is the taxpayer a resident of Australia in respect of the income year ended 30 June yyyy for the purposes of subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

No

Question 2

If the answer to Question 1 is no, would the capital gain made by the Taxpayer on the sale of shares in the resident company be disregarded for CGT purposes under Subdivision 855-A of the Income Tax Assessment Act 1997 (ITAA 1997) for the year ended 30 June yyyy?

Answer

Yes

Question 3

Is the Taxpayer required to lodge an income tax return for the year ended 30 June yyyy?

Answer

No

This ruling applies for the following period:

The year ended 30 June yyyy

The scheme commences on:

1 July xxxx

Relevant facts and circumstances

• The Taxpayer was born in country Y and currently resides in country X. They are over 65 years of age.

• The Taxpayer acquired X ordinary shares in an Australian private company, in the bbbb income year.

• They have also been a director of this company since bbbb. The shares capital of the company since the Taxpayer acquired their shares, has been at all times as follows:

Shareholders	Type of shares	No. of shares	%	Voting rights
A	Ordinary	X	40	Yes
B	Ordinary	X	20	Yes
The Taxpayer	Ordinary	X	20	Yes
C	Ordinary	X	20	Yes

• The Taxpayer has no interest in any shares in the capital of the company other than the X ordinary shares identified above.

• The Taxpayer held their shares in the company on capital account and they were not held as trading stock.

• The cost base of the Taxpayer's shares in the company is nominal (ie $1 each).

• The Taxpayer's involvement with the company, in addition to holding shares was primarily the supply of the specific products via his country X manufacturing entity. The Taxpayer was originally offered the shareholding in the company to ensure exclusive supply of specific products by their overseas manufacturing plant, which was also the sole provider to the company.

• The Taxpayer's manufacturing operations are based in country X. Their operations supply numerous organisations in many international jurisdictions.

• The Taxpayer did not own any other Australian assets (with the exception of their former 20% shareholding in the company) during the relevant period. Their personal and investment assets are located in country Y and country X.

• The Taxpayer holds an Australian bank account, which was opened solely for the purpose of receiving dividends from the company.

• None of the assets of the company comprise of real property or interests held in real property other than a leasehold interest of $X million at its business premises.

• The company did not own land at the time of disposal of the Taxpayer's shares to company D.

• All of the shareholders of the company including the Taxpayer sold their shares to company D (Australia) Pty Ltd for consideration in the amount of $X million pursuant to the Share Sale Agreement dated 30 April yyyy (the Sale Share Agreement attached to the application). The consideration of $X million was distributed to the shareholders in proportion to their shareholding in company as follows:

Shareholders	%	Amount ($)
A	40	X
B	20	X
The Taxpayer	20	X
C	20	X
Total		X

• For the period 1 July xxxx to 30 June yyyy, the Taxpayer spent approximately 35 days in Australia. In the last 5 years, the Taxpayer has visited Australia for very short periods (between 4 to 5 weeks per year) for the purpose of attending business meetings in relation to the company. On these business trips, the Taxpayer stayed in hotels as he does not have an established residence in Australia. The Taxpayer's visits to Australia also included vacations that were not business related.

• The Taxpayer was also visiting their child that lived in an Australian state from zzzz through to yyyy. That child was undertaking their university studies in an Australian city. The remainder of their family (ie spouse and children) resides in country Y and country X, but are also citizens of country Z.

• The Taxpayer doesn't have any social/living ties to Australia.

• The Taxpayer is not a member of a superannuation scheme established under the Superannuation Act 1990.

• The Taxpayer is not an eligible employee for the purpose of the Superannuation Act 1976 and they are not the spouse of a person covered by either of the Superannuation Acts.

• The Taxpayer has never been required to lodge an Australian income tax return.

• On dd/mm/yyyy, in response to our enquires, the tax agent advised the following:

• The taxpayer still maintains their Australian bank account for personal use and travel purposes.

• For the year ended 30 June yyyy, the taxpayer did not derive any income from Australian sources (other than the capital gain made from sale of their 20% shareholding in the company).

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1936 section 161

Income Tax Assessment Act 1997 subsection 102-5(1)

Income Tax Assessment Act 1997 subsection 855-10(1)

Income Tax Assessment Act 1997 section 855-15.

Income Tax Assessment Act 1997 section 855-30

Income Tax Assessment Act 1997 subsection 855-25(1)

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 section 960-195

Reasons for decision

Question 1

Summary

The taxpayer is not considered to be a resident of Australia for the purposes of subsection 6(1) of ITAA 1936 during the income year ended 30 June yyyy.

Detailed reasoning

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:

• residence according to ordinary concepts

• the domicile and permanent place of abode test

• the 183 day test, and

• the Commonwealth superannuation fund 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

Taxation Ruling TR 98/17 (TR 98/17) contains the Commissioner's interpretation of the ordinary meaning of the word 'resides' (within the definition of resident in subsection 6(1) of the ITAA 1936).

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'.

Furthermore, paragraphs 42 to 63 of TR 98/17 provides a detailed examination of factors and circumstances that describe an individual's behaviour in Australia. No single factor necessarily determines residency and many factors are interrelated.

In light of the above and based on the information provided in the application, the Taxpayer is not considered to be a resident of Australia for tax purposes for the year ended 30 June yyyy as their behaviour did not reflect the required degree of continuity, routine or habit that is consistent with residing here. This is because:

• The Taxpayer has come to Australia as a short business trip traveller without any intention to settle permanently. The main purpose of visiting Australia was predominantly for short business trips (for the purpose of attending business meetings in relation to the company) and short vacations. While the Taxpayer also visited their child that was undertaking their university studies, it was not the main purpose of their travel to Australia.

• The lack of the intention to remain in Australia for a considerable amount of time. The Taxpayer spent only 35 days in Australia for the year ended 30 June yyyy and this is consistent with previous years.

• The lack of significant family ties in Australia. Given that the Taxpayer was only visiting their child during their business trips to Australia (who has had no intension to settle in Australia), this would suggest that the Taxpayer's family ties are weak as the reminder of their family reside overseas and their stay in Australia is not within the ordinary habits of their lifestyle.

• The Taxpayer does not own a place of residence or any personal or investment assets in Australia, besides their former 20% shareholding in the company. The Australian bank account they hold is for the sole purpose of receiving dividends from the company. All of their real and personal assets (ie houses, cars) are located in country Y and country X. Although the Taxpayer sold their shares on dd/mm/yyyy, they still maintain an Australian bank account for personal use and travel purposes.

• The lack of social/ living arrangements and ties in Australia. Given that the Taxpayer stayed in hotels when they visited Australia and doesn't have any social/living ties to Australia, this would suggest that the Taxpayer would not ordinarily reside 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.

'Domicile' is a legal concept and determined according to the Domicile Act 1982 and common law rules.

Section 10 of the Domicile Act 1982 requires the Taxpayer to have had the intention to make their home indefinitely in another country, in order to have acquired a domicile of choice in that country

In light of the above and based on the facts provided, the Commissioner is of the view that the Taxpayer's domicile for the year ended 30 June yyyy was not in Australia. Therefore, the Taxpayer is not considered to be a resident of Australia under the 'domicile and permanent place of abode' test in subparagraph 6(1)(a)(i) of the ITAA 1936 for the following reasons:

• The Taxpayer physically resided between country Y and country X for the majority of the yyyy income year.

• The Taxpayer only visited Australia for approximately 35 days for business related activities, vacation and stayed in temporary accommodation (ie hotels) during the year ended 30 June yyyy. The actual time spent outside Australia demonstrates their intension of permanently residing in a country other than Australia (ie country Y and country X).

• The Taxpayer's personal and investment assets (homes and cars) are located in country Y and country X. Although the Taxpayer has an Australian Bank account and held 20% of the shares in the company for the year ended 30 June yyyy, they have established homes in country Y and country X but not in Australia.

• The Taxpayer's family ties in Australia are weak as they were only visiting their child who rented an apartment and lived in an Australian state from zzzz through to yyyy. The Taxpayer's child was undertaking their university studies in an Australian city and they have now returned to country Y in yyyy and have had no intension to settle in Australia. The reminder of their family (ie spouse and children) reside in country Y and country X, but are also citizens of country Z.

• The Taxpayer's dwellings are located in country Y and country X. When the Taxpayer visited Australia in the year ended 30 June yyyy, they stayed in temporary accommodation (ie hotels) as they do not have an established place of abode in Australia.

• The Taxpayer's main business interests are in country Y and country X. Their manufacturing operations are based in country X.

• The Taxpayer has disposed his 20% shareholding in the company investments in Australia on 30 April yyyy. Although the Taxpayer maintains a bank account in Australia (which was held for the sole purpose of receiving dividends from the company) it still remains for personal use and travel purposes.

The 183-day test

Under this test, if you are actually present in Australia for more than half the income year, whether continuously or intermittently, you may be said to have a constructive residence in Australia unless it can be established that:

• Your usual place of abode is outside Australia; and

• You have no intention to take up residence here.

In this test, the commissioner must be satisfied that the Taxpayer's usual place of abode is outside Australia.

The Taxpayer advised in their application that, they only spent approximately 35 days in Australia for the year ended 30 June yyyy with no intension to take up residence here and their usual place of abode is in overseas. Given that the Taxpayer has not physically been in Australia more than 183 days for the year ended 30 June yyyy, the '183 day' test as set out in subparagraph 6(1)(a)(ii) of the ITAA 1936 is not satisfied.

The superannuation test

Based on the information provided in the application:

• The Taxpayer is not a member of a superannuation scheme established under the Superannuation Act 1990.

• The Taxpayer is not an eligible employee for the purpose of the Superannuation Act 1976 and they are not the spouse of a person covered by either of the Superannuation Acts.

Therefore the 'Commonwealth superannuation fund' test as set out in subparagraph 6(1)(a)(iii) of the ITAA 1936 is not applicable.

Your residency status

As the Taxpayer is not a resident of Australia according to ordinary concepts and they do not satisfy any one of the three additional statutory residency tests outlined in subsection 6(1) of the ITAA 1936, they are not considered to be an Australian resident for taxation purposes for the income year ended 30 June yyyy.

Question 2

Summary

The capital gain made by the Taxpayer on the sale of their shares in the resident company, would be disregarded for CGT purposes under Subdivision 855-A of the ITAA 1997 for the year ended 30 June yyyy.

Detailed reasoning

A capital gain made by a foreign resident is included by subsection 102-5(1) of the ITAA 1997, relevantly Step 1 of calculating their net capital gain for the income year in which the disposal happens, unless it is disregarded under Subdivision 855-A of the ITAA 1997.

In Subdivision 855-A of the ITAA 1997, subsection 855-10(1) provides that you can disregard a capital gain or capital loss from a CGT event if:

• you are a foreign resident just before the CGT event happens; and

• the CGT event happens in relation to a CGT asset that is not taxable Australian property.

What constitutes taxable Australian property is set out in the table in section 855-15 of the ITAA 1997. Item 2 of the table states that a CGT asset that is an indirect Australian real property interest, is taxable Australian property.

Subsection 855-25(1) of the ITAA 1997 states that a membership interest (for example, a shareholding in a company) is an indirect Australian real property interest, when the CGT event happens, if the interest passes:

• the non-portfolio interest test at that time or throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time; and

• the principal asset test in section 855-30 at that time.

Under section 960-195 of the ITAA 1997, the non-portfolio interest test is satisfied if the sum of the interests in the company held by the foreign resident and its associates is 10% or more.

The principal asset test under section 855-30 of the ITAA 1997 is satisfied if the sum of the market values of the company's taxable Australian real property assets exceeds the sum of the market values of its assets that are not taxable Australian real property.

Application to your case

As per the answer to Question 1 of this Ruling, the Taxpayer is not a resident of Australia for the purposes of subsection 6(1) of the ITAA 1936 for the year ended 30 June yyyy. Therefore, they are a foreign resident for Australian taxation purpose for that year. They are a foreign resident just before the disposal of his CGT asset in mm/yyyy, consisting of their direct participation interest (their 20% shareholding) in the Australian resident company. The capital gain will be taxable unless the shares are not taxable Australian property.

According to paragraph 350(1)(a) of the ITAA 1936, the Taxpayer held a direct control interest in a company since bbbb which is equal to 20% of the total paid-up share capital of the company. The Taxpayer has the rights during the acquisition of their shares to vote and to receive distributions of dividends. As such, the Taxpayer has a direct participation interests in the company.

For present purposes, in order to be an 'indirect Australian real property interest' at a certain time (in this case, when CGT event A1 happened in April yyyy), Section 960-195 of the ITAA 1997 requires a holding entity to 'hold' a 'membership interest' in a test entity (the company) at that time - being an interest that passed the 'non-portfolio interest test' if the sum of the direct participation interests held by the holding entity and its associates in the test entity at that time is 10% or more.

The taxpayer held direct participation interests in the company between the bbbb and yyyy income years when CGT event A1 happened in 30 April yyyy. The sum of their direct participation interests that is 20%, exceeded 10% at that time.

Since the 'non-portfolio interest test' is satisfied, the principal asset test must also be considered.

Based on the facts provided in the application, the sum of the market value of the company's TARP assets that was attributable to real property situated in Australia (ie the company's X M leasehold interest) did not exceed the total of the company's non-TARP assets (ie the consideration paid for the company by the company D in the amount of $X million). Therefore, the principal asset test is not satisfied. That is supported by the fact that the company did not own land at the time of disposal of the Taxpayer's shares to the company D.

Accordingly, the taxpayer's interest in the Australian resident company is not an indirect Australian real property interest. As such, the taxpayer's interest is not taxable Australian property.

Consequently, the capital gain made by the Taxpayer is disregarded under subsection 855-10(1) and is not included in the capital gains referred to in Step 1 of the calculation of a net capital gain under subsection 102-5(1) of the ITAA 1997.

Conclusion

Since the Taxpayer is a foreign resident for tax purposes in the yyyy income year just before the CGT event happens in April yyyy, under subsection 855-10(1) of the ITAA 1997, they can disregard the capital gain made on disposal of their shares (20% shareholding in the company) as they are not Australian taxable property.

Question 3

Summary

The Taxpayer is not required to lodge an income tax return for the year ended 30 June yyyy.

Detailed reasoning

The requirement to lodge income tax returns is provided by section 161 of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 161(1) of the ITAA 1936 states that every person must lodge a tax return for a given financial year, if required by the Commissioner according to a notice in the Gazette.

The notice contains the Commissioner's Legislative Instrument and Explanatory Statement (Lodgment of tax returns and statements for the year ended 30 June 2014 - Income Tax, Number TPAL 2014/1, registered on 10 June 2014).

Table D of the above Instrument states that:

Every person (not being a full self-assessment taxpayer), except where they are described in Table M, who was not an Australian resident at any time during the year of income must lodge a tax return if they derived income (including capital gains) that is taxable in Australia other than:

• dividend, interest or royalty income subject to withholding covered by Subdivision 12-F of Schedule 1 to the Taxation Administration Act 1953 , and

• fund payments from managed investment trusts subject to withholding covered by Subdivision 12-H of Schedule 1 to the Taxation Administration Act 1953 .

In this instrument, a 'full self-assessment taxpayer' means:

a company, a trustee of a corporate unit trust, a trustee of a First Home Saver Account trust, a trustee of a public trading trust, a trustee of an approved deposit fund, a trustee of a superannuation fund, a trustee of a pooled superannuation trust or a corporate limited partnership that is treated as a company by virtue of the provisions of Division 5A of Part III of the Income Tax Assessment Act 1936.

Exceptions to the requirement to lodge an income tax return under this instrument

A person described in Tables D is not required to lodge an income tax return under this legislative instrument if they are described in Table M. (See the Note after Table M).

TABLE M (to be read in conjunction with Tables D

(1)   Every person whose assessable income during the year of income included payments received in respect of one or more of:

Social security benefits and allowances, that is, Newstart allowance, sickness allowance, Youth allowance, Disaster recovery allowance, special benefit, widow allowance, partner allowance, parenting payment (partnered), Austudy payment; Exceptional circumstances relief payments; Interim income support payment;

Specified Commonwealth education and training payments to persons 16 years or older, that is, payments made under ABSTUDY (including the ABSTUDY Masters and Doctorate Award), the Veterans' Children Education Scheme, the Military Rehabilitation and Compensation Act Education and Training Scheme (known as 'MRCA Education Allowance' on a PAYG payment summary);

Commonwealth labour market programs, such as Green Corps Training Allowance, New Enterprise Incentive Scheme Allowance;

Income support component of wages paid to participants in the Community Development Employment Projects (CDEP) Scheme and CDEP Scheme participant supplement.

AND

(a)  who had no other assessable income; or

(b)  whose taxable income was less than or equal to $ 20,542 .

(2)  Every person who qualified for a tax offset under section 160AAAA of the Income Tax Assessment Act 1936 during the year of income and whose rebate income was less than or equal to the following amounts:

(A)  if at any time during the year of income the person was single, widowed or separated - $ 32 , 279 ; or

(B) if at any time during the year of income the person and their spouse (married or de facto) had to live apart due to illness or the person or their spouse was in a nursing home - $ 31 , 279 or

(C) if at any time during the year of income the person and their spouse (married or de facto) lived together - $ 28 , 974 .

 If a person is covered by more than one category during the year of income, the person is taken to be covered by category (A) or, if category (A) does not apply, category (B).

NOTE:

Legislative instrument Lodgment of income tax returns for the year of income ended 30 June 2014 in accordance with the Income Tax Assessment Act 1936 and the Taxation Administration Act 1953 - Department of Human Services - parents with a child support assessment requires persons to lodge an income tax return where they are a liable or recipient parent under a child support assessment unless they are in receipt of specified Australian Government pensions, allowances or payments for the whole of the year of income and the total of their:

• taxable income

• exempt Australian Government allowances, pensions and payments

• target foreign income

• reportable fringe benefits

• total net investment loss, and

• reportable superannuation contributions

for the income year was less than $23,523.

A capital gain made by a foreign resident is included by subsection 102-5(1) of ITAA 1997. Relevantly Step 1 of calculating their net capital gain for the income year in which the disposal happens, unless it is disregarded under Subdivision 855-A of the ITAA 1997.

Application to your case

According to above Commissioner's Legislative Instrument, the facts supplied in the application and the Australian Tax Office's publications which make reference to lodgment requirements, The Taxpayer is not required to lodge an income tax return for the year ended 30 June yyyy, for the following reasons:

• The Taxpayer is not an Australian resident for Australian tax purposes for the year in question.

• The shares in the company were not acquired for the purpose of profit by sale and therefore are not assessable as ordinary income in accordance with the principles identified by the High Court in Federal Commissioner of Taxation vs Myer Emporium Ltd [1987] HCA 18.

• The Taxpayer did not derive any income from Australian sources that is taxable in Australia (other than dividend, interest and royalty income subject to withholding tax and the capital gain made from sale of their 20% shareholding in the company which is disregarded under subdivision 855-A) ; and

The Taxpayer is not described in table M of the above instrument.