Edited version of your written advice

Authorisation Number: 1013094886902

Date of advice: 28 September 2016

Ruling

Subject: residency status

Questions and Answers

1. Will you be a resident of Australia for tax purposes as defined by subsection 6(1) of the Income Tax Assessment Act 1936 for the period of this ruling?

Yes

2. Will you be a resident of Australia for the purposes of the Double tax agreement between Australia and Country X (Country X Agreement)?

No

3. Will you be a dual resident of Australia and Country X for the purposes of Article A(3) of the Country X Agreement?

Yes

4. Will you have a permanent home available to you in both Australia and Country X under Article A(3)(a) of the Country X Agreement?

Yes

5. Will your personal and economic relations be closer to Country X and not Australia under Article A(3)(a) of the Country X Agreement?

Yes

6. Will you be a resident of Country X under the Country X Agreement?

Yes

7. Will you be assessable on non-Australian rental income?

No

8. Will you be assessable on non-Australian dividend income?

No

9. Will you be assessable on non-Australian interest income?

No

10. Will you be assessable on non-Australian employment income?

No

11. Will you be assessable on other income derived from sources outside Australia?

No

12. Will you be assessable on non-Australian trust income that is accumulated within foreign unit trusts?

No

13. Will your Australian sourced dividends, interest and royalties income, whether derived personally or via trusts, be assessable in Australia and taxed at rates limited under the Country X Agreement?

Yes

14. Where any of the amounts in Question 13 are not subject to Australian tax, will the Commissioner consider those amounts constitute non-assessable non-exempt income pursuant to section 6-23 of the ITAA 1997?

Yes

15. Will you be assessable on any capital gains on assets acquired by you before 20 September 1985?

No

16. Is the first element of the cost base equal to the market value of your assets at the time you became an Australian resident on date Z?

Yes

17. Will you only be assessable on capital gains made when you sell or redeem your units in foreign unit trusts, and not when capital gains arise to the trustees upon the earlier sale of those foreign trusts' underlying assets?

Yes

18. Are you assessable on non-Australian sourced income and capital gains (Including non-Australian trust income and capital gains)?

No

19. As a resident of Australia will you be liable for tax at resident rates and be eligible for tax offsets?

Yes

Relevant facts

You were born in Australia.

You are a resident of Country X under their income tax laws.

Your spouse was born in Country X and was naturalised in Australia.

You left Australia with your spouse to live in Country X many years ago and you both have been there since then.

You were naturalised in Country X more than 20 years ago.

You became a resident of Australia for tax purposes on date P.

You and your spouse are contemplating coming to Australia to live permanently in a later year but have made no decision when to do so.

You have one adult child in Australia and your other children live elsewhere. They are mature children capable of living independently.

You and your spouse will continue to spend m months a year in Australia (which is the majority of each year), over n months in Country X, with any balances away from both countries on holidays.

Your stated intention of stay in Australia is holiday focussed away from your business in Country X. During your time in Australia you live in your home, purchased several years ago, which you describe as a holiday home.

You have a home in Country X which is still occupied by a family member. You jointly own the home with your spouse.

You have a small business in Country X. It is expected that when in Australia the current day to day running of this business can be done by remote in Australia via the net. You will not be employed in Australia and will carry out charity work.

You have an investment portfolio in Country X which is professionally managed. The shares are in public companies that are incorporated outside Australia.

You are a unit holder in publicly quoted foreign unit trusts which are managed and controlled by trustees in Country X. Income is earned by the respective trustees with such underlying income and capital gains being accumulated in those trusts for reinvestment. The income is earned from sources in Country X and from sources in other countries. You are not presently entitled to any distribution.

You jointly own property in Australia but do not derive income from the property. You have an Australian joint bank account. You derive income from Australian sourced interest, dividends and royalties.

You will maintain your foreign drivers licence, insurances, credit cards, bank accounts, health insurance, mobile phones, and internet service provider while in Australia. You have household effects and motor vehicles that will remain in Country X. Your Country X home will continue to be your postal address for service of bills and for the purposes of National Health Insurance.

Your extended family is in Australia but you have no sporting connections in Australia. Your only social connections in Country X are those friends made since moving to Country X.

Your activities in Australia include, spending time with your extended family,, attending fitness clubs, kayaking, attending the Theatre, attending talks at the Institute, attending weekly family events, regional trips to visit friends and family and regular visits to galleries.

Relevant legislative provisions

Subsection 6(1) of the Income Tax Assessment Act 1936

Section 6-5 of the Income tax Assessment Act 1997

Reasons for decision

Residency - Question 1

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 (or conversely, a foreign resident) for income tax purposes. These tests are the:

  (1)   residence according to ordinary concepts test

(2)   domicile and permanent place of abode test

(3)   183 day test, and

(4)   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 a resident of Australia for tax purposes if they satisfy the conditions of one of the other three tests.

Residence according to ordinary concepts

The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, is 'to dwell permanently or for a considerable time; having one's abode for a time'.

Taxation Ruling TR 98/17 considers the residency status of individuals entering Australia and states that the period of physical presence or length of time in Australia is not, by itself, decisive when determining whether an individual resides here. However, an individual's behaviour over the time spent in Australia may reflect a degree of continuity, routine or habit that is consistent with residing here.

In your case, you will reside in Australia as your behaviour does reflect the required degree of continuity, routine or habit that is consistent with residing here.

This is because:

● You will come to Australia for M months per year and will be accompanied by your spouse for most of that time.

● While you will not seek employment in Australia you are doing charity work which is not usual for someone on holiday.

● You have one adult child in Australia. Your other children will remain overseas. They are mature children capable of living independently.

● You jointly property in Australia. You have an Australian joint bank account. You will derive income from Australian sourced interest, dividends and royalties.

● While you have personal assets in Country X you will have similar assets in Australia to allow you to live in the home in Australia for the majority of each year.

As you are a resident of Australia under the resides test it is not necessary to consider the other residency tests. You became a resident of Australia for tax purposes on date P and will continue to be a resident of Australia for income tax purposes for the period of this ruling.

Double tax agreement - Questions 2-6

You are a resident of Australia for income tax purposes. You are also a Country X resident for Country X income tax purposes. Thus you are a dual resident.

The Double tax agreement between Australia and Country X (Country X Agreement) operates to avoid tax for Australian and Country X residents.

Article A of the Country X Agreement deals with residency. In particular, a paragraph of Article A of the Country X Agreement states:

The (residency) status of an individual who, by reason of the preceding provisions of this Article is a resident of both Contracting States, shall be determined as follows:

(a) that individual shall be deemed to be a resident only of the Contracting State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests);

(b) if the Contracting State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State of which that individual is a national;

(c) if the individual is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall endeavour to resolve the question by mutual agreement.

In your case you have a permanent home in both Australia and Country X. Under Article A of the Country X Agreement, if you have a permanent home in both Australia and Country X you would still be considered to be a resident of Country X under the Country X Agreement because your personal and economic relations are closer to Country X than Australia (you have family and social connections in Country X, you have a small business in Country X and have income from a trust based in Country X).

Accordingly, you will you be a resident of Country X, and not a resident of Australia, under the Country X Agreement.

Non-Australian income derived personally - Questions 7-11

You will not be assessable in Australia on income derived from sources outside Australia, unless it is included in your assessable income under a specific provision.

As you are a Country X resident under Article A of the Country X Agreement, you will not be assessable in Australia on your non-Australian income from rent, dividends, interest, employment or other income which you derive personally.

Non-Australian trust income accumulated within foreign trust - Question 12

You are a unit holder in publicly quoted foreign unit trusts which are managed and controlled by trustees in Country X. Income is earned by the respective trustees with such underlying income and capital gains being accumulated in those trusts for reinvestment. The income is earned from sources in Country X and from sources in other countries.

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

However, as you are not presently entitled to any distribution and the source of the income is outside Australia, there is no tax liability in your situation. Sections 99B to 99E of the ITAA 1936 are not applicable. You will not be assessable on non-Australian trust income that is accumulated within foreign unit trusts.

Australian income form dividends, interest and royalties - Question 13

Under Article B of the Country X Agreement your Australian sourced dividends whilst being assessable to you, can only be taxed in Australia at a rate no more than x per cent of the gross amount of the dividends.

Under Article C of the Country X Agreement your Australian sourced interest whilst being assessable to you, can only be taxed in Australia at a rate no more than y per cent of the gross amount of the interest.

Under Article D of the Country X Agreement any Australian sourced royalties whilst being assessable to you, can only be taxed in Australia at a rate no more than z per cent of the gross amount of royalties.

Non-assessable non-exempt income - Question 14

Under section 6-23 of the ITAA 1997 an amount of ordinary income or statutory income is non-assessable non-exempt income if a provision of the ITAA 1997 or ITAA 1936 or of another Commonwealth law states that it is not assessable income and is not exempt income. Subdivision 11-B of the ITAA 1997 contains a check list of non-assessable non-exempt provisions.

Thus, where any of the amounts in Question 15 are not subject to Australian tax, the Commissioner will consider those amounts constitute non-assessable non-exempt income pursuant to section 6-23 of the ITAA 1997.

CGT implications of assets acquired before 20 September 1985 - Question 15

The Australian CGT provisions are found in Parts 3-1 and 3-3 of the ITAA 1997. The CGT rules only apply to assets acquired on or after 20 September 1985. Thus you can ignore any capital gain made on assets you acquired before 20 September 1985.

First element of the cost base - Question 16

The cost base of a CGT asset is made up of five elements. The first element constitutes the money or property given to acquire an asset.

If a non-resident individual becomes an Australian resident, a special acquisition rule applies in respect of certain CGT assets owned by the individual just before becoming a resident (section 855-45 of the ITAA 1997). The special acquisition rule is that the taxpayer is treated as having acquired the asset at the time of becoming a resident (subsection 855-45(3) of the ITAA 1997). In your case you became an Australian resident for tax purposes on date P.

However, the rule in section 855-45 of the ITAA 1997 does not apply to assets that are taxable Australian property or assets that were acquired before 20 September 1985 (subsection 855-40(1) of the ITAA 1997). The general cost base rules apply to any CGT assets that are taxable Australian property.

Units in foreign unit trusts - Question 17

For CGT purposes, shares in a company or units in a unit trust are treated in the same way as any other assets. Where a person acquires units on or after 20 September 1985, they will need to consider the CGT implications when a CGT event happens. This would usually be when the person sells or otherwise disposes of them. It also includes where the person redeems units. CGT event A1 happens in these situations.

Thus in your case, as a unit holder, you will only be assessable on capital gains made when you sell or redeem or units in foreign unit trusts (ie when a CGT event happens to you), and not when capital gains arise to the trustees upon the earlier sale of those foreign trusts' underlying assets.

Non-Australian sourced income and capital gains - Question 18

Subsection 6-5(3) of the ITAA 1997 states:

If you are a foreign resident, your assessable income includes:

a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and

Accordingly in your case, you will be assessable on income derived from all sources inside Australia (and any other income that is included by a specific provision). You will not be assessable in Australia on income derived from sources outside Australia, unless it is included in your assessable income under a specific provision. This means your non-Australian sourced income (including non-Australian sourced trust income) and capital gains will not be assessable in Australia.

Tax rates and tax offsets - Question 19

Residents are subject to resident tax rates on their Australian sourced income. Residents are also generally eligible to claim personal tax offsets in their income tax return where the conditions of each tax offset is satisfied.

As you are a resident for tax purposes on your Australian sourced income for the years in question, any Australian sourced income including income from real property derived by you will be subject to tax at resident tax rates. These tax rates include the tax free threshold for the whole year. You are also eligible for tax offsets, provided the conditions of the tax offsets are satisfied.