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Edited version of your written advice
Authorisation Number: 1051354350923
Ruling
Subject: Residency
Question 1
Are you a resident of Australia for tax purposes?
Answer
No
Question 2
Are you entitled to claim the full capital gains tax discount on the sale of your investment property?
Answer
No
This ruling applies for the following periods:
Year ended 30 June 2017
Year ending 30 June 2018
The scheme commences on:
01 July 2016
Relevant facts and circumstances
You are a citizen of a foreign country.
You were a tax resident of Australia before relocating back to the foreign country.
During your time of residence in Australia, you owned and ran a business and purchased an Australian investment property.
Your business then ceased operations and you relocated to the foreign country.
You retained co-ownership of the Australian investment property after your relocation.
Your intention was to eventually leave all property holdings in Australia to the other co-owner.
You became a tax resident of the foreign country following your relocation.
Due to your personal circumstances you are unable to leave Australia and precluded from working.
You did not intend to return to Australia on a permanent basis.
Your investment property was sold while you were in Australia.
Neither you nor your spouse is a member of a Commonwealth Government Superannuation Scheme.
Relevant legislative provisions
Income Tax Assessment Act 1936, Section 6(1)
Income Tax Assessment Act 1936, Section 6-5
Reasons for decision
Residence
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.
The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are the:
● resides test
● domicile and permanent place of abode test
● 183 day test and
● 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 (ordinary concepts) test
The ordinary meaning of the word 'reside', according to the Macquarie Dictionary, 2001, rev. 3rd 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'.
Recent case law decisions have considered the following factors in relation to whether the taxpayer was a resident under the ‘resides’ test:
(i) Physical presence in Australia
(ii) Nationality
(iii) History of residence and movements
(iv) Habits and "mode of life"
(v) Frequency, regularity and duration of visits to Australia
(vi) Purpose of visits to or absences from Australia
(vii) Family and business ties to different countries
(viii) Maintenance of place of abode.
These factors are similar to those which the Commissioner has said are relevant in determining the residency status of individuals in Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia.
It is important to note that not one single factor is decisive and the weight given to each factor depends on individual circumstances.
In your case, we note the following:
● You resided in, and were a tax resident of, the foreign country prior to your return to Australia
● You had not intended to return to Australia on a permanent basis
● You had cut all business ties in Australia excluding the investment property
● You only returned to Australia due to your particular personal circumstances.
● You have been precluded from leaving Australia and working.
Based on your current circumstances as noted above, you are not an Australian resident according to ordinary concepts.
The domicile and permanent place of abode test
If a person’s domicile is Australia they will be an Australian resident unless the Commissioner is satisfied they have a permanent place of abode outside of Australia.
A person’s domicile is generally their country of birth. This is known as a person’s ‘domicile of origin’. In order to show that an individual’s domicile of choice has been adopted, the person must be able to prove an intention to make his or her home indefinitely in that country.
In your case, we note the following:
● Your domicile of origin is in a foreign country
● You regained your foreign domicile when you relocated to that country
● You have no intention of returning to Australia on a permanent basis
Therefore, your domicile is in a foreign country and you are not 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 place of abode is outside of Australia and they have no intention of taking up residence here.
In your case, you spent less than 183 days in Australia for the income year which ended 30 June 2017.
Although you have been physically present in Australia for more than 183 days in the income year ending 30 June 2018, the Commissioner is satisfied that your usual place of abode is in a foreign country and you have no intention of taking up residence in Australia.
Therefore, you are not a resident of Australia under this test.
The superannuation test
An individual is still considered to be a resident if that person is eligible to contribute to the Public Service Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS), or that person is the spouse or child under 16 of such a person.
You will not be treated as a resident under this test as you are not a member of the PSS or the CSS, a spouse of such a person, or a child under 16 of such a person.
Your residency status
Given the circumstances listed above, you are not a resident of Australia for the income years ending 30 June 2017 and 30 June 2018.
Capital gains tax discount for foreign residents
Generally, foreign resident individuals are only subject to capital gains tax (CGT) on taxable Australian property, which includes residential and commercial real estate and mining assets. As these assets are immobile and produce location specific returns, the government considered that a reduction in the effective tax rate (by way of the CGT discount) would not be necessary to attract foreign investment in these assets.
Accordingly, the government announced in the 2012/13 Federal Budget that the CGT discount would not apply to discount capital gains made by foreign residents. However, the discount continues to apply to the portion of the discount capital gain of a foreign or temporary resident individual that accrued up until the date of announcement (8 May 2012).
Subdivision 115-B of the Income Tax Assessment Act 1997 (ITAA 1997) introduced legislation in regards to non-residents and the CGT discount. Any individuals who had a period of non-residency and disposed of a CGT asset after 8 May 2012 are no longer entitled to the full 50% CGT discount, and must now apportion their discount percentage.
Section 115-115 of ITAA 1997 defines the four different scenarios and formulas available for calculating the CGT discount available for non-residents.
Subsection 115-115(3) of ITAA 1997 will apply where the asset is acquired before 8 May 2012, and you were an Australian resident on 8 May 2012:
Number of days in discount — Number of apportionable days that you testing period were a foreign resident or *temporary resident
÷
2 × Number of days in discount period
(expressed as a percentage)
Example:
01/10/2011 – Mary acquires an asset (DTP begins)
01/07/2013 – Mary becomes a foreign resident
22/4/2015 – Mary disposes of the asset (DTP ends)
Calculation:
Days in DTP = 1,300 days
Apportionable days foreign resident = 661 days
(1300 days – 661 days) / (2 X 1300 days) = 24.57% CGT discount
Your claim to the capital gains tax discount
In your case, you are not entitled to the full CGT for the sale of your investment property. You will need to apportion the discount on your share of the sale proceeds by using the calculation method above.