Edited version of private advice

Authorisation Number: 1051970177713

Date of advice: 6 April 2022

Ruling

Subject: Residency

Question 1

Are you a resident of Australia for taxation purposes?

Answer

Yes.

Question 2

Did you acquire your shares in the company at their market value on the date you became a resident of Australia for taxation purposes?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born in Country Y.

You are a citizen of Australia.

You relocated to Country Z many years ago.

You have been a non-resident of Australia up until the 20XX income year.

A number of years ago you married a Country Z national, and you have a child together.

You have been living in Country Z on long term visas.

You live in a residence owned by your spouse in Country Z. Your spouse has ownership of most assets in country Z and you only have a bank account with a small sum in your own name in Country Z.

You and your spouse are currently building a home in Country Z.

You have 2 adult children living in Australia.

Your Australian sourced income comprises of dividends from shares in an Australian private company and rental income from investment properties.

You acquired your shares in the company after you became a non-resident of Australia for taxation purposes.

The company does not own any Australian real property.

You sold an investment property in Australia in the financial year ended 30 June 20XX, leaving only one commercial property that is deriving income.

You purchased a property in Australia in November 20XX which is to be inherited by your 2 adult Australian children.

In February XXXX, you were diagnosed with a serious illness and were initially given no more than six months to live.

Due to the better medical infrastructure in Australia, you relocated to Australia for the purpose of your medical treatment. Your spouse and daughter remained in Country Z.

You have remained in Australia on your doctor's advice, as your immune system is compromised, and it is considered too dangerous for you to travel during the COVID-19 outbreak.

You are living in a property in Australia which is owned by a related entity.

Your wife and dependent child came to Australia to be with you during the COVID-19 outbreak and have not returned to Country Z due to the global situation.

Your child has enrolled in school in Australia.

Your spouse has been granted a permanent 801 visa to remain in Australia.

You have remained in Australia during the 20XX income year.

Neither you nor your spouse is a member of an Australian Commonwealth government superannuation fund.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

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, as applied to an individual, are defined in subsection 6(1) of the ITAA 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,
• the domicile test,
• the 183 day test, and
• the superannuation test.

The primary test for deciding the residency status of an individual is whether they reside in Australia according to the ordinary meaning of the word resides.

Where an individual does not reside in Australia according to ordinary concepts, they will still be an Australian resident if they meet the conditions of one of the other tests.

The resides 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'. These definitions have been highlighted in cases as being definitive observations of the meaning of resides (see Viscount LC in Levene v Commissioners of Inland Revenue [1928] AC 217 and Logan J in Stockton v Federal Commissioner of Taxation [2019] FCA 1679).

The observations contained in the case of Hafza v Director-General of Social Security (1985) 6 FCR 444 are also important:

Physical presence and intention will coincide for most of the time. But few people are always at home. Once a person has established a home in a particular place - even involuntarily: see Commissioners of Inland Revenue v Lysaght [1928] AC 234 at 248; and Keil v Keil [1947] VLR 383 - a person does not necessarily cease to be resident there because he or she is physically absent. The test is whether the person has retained a continuity of association with the place - Levene v Inland Revenue Commissioners [1928] AC 217 at 225 and Judd v Judd (1957) 75 WN (NSW) 147 at 149 - together with an intention to return to that place and an attitude that that place remains " home ": see Norman v Norman (No 3) (1969) 16 FLR 231 at 235... [W]here the general concept is applicable, it is obvious that, as residence of a place in which a person is not physically present depends upon an intention to return and to continue to treat that place as " home ", a change of intention may be decisive of the question whether residence in a particular place has been maintained.

Case law decisions have considered the following factors in relation to whether the taxpayer was a resident under the 'resides' test:

• Physical presence
• Intention or purpose of presence
• Family and business/employment ties
• Maintenance and location of assets, and
• Social and living arrangements

These factors are similar to those which the Commissioner has said are relevant in determining the residency status of individuals in Taxation Ruling IT 2650 Income tax: residency - permanent place of abode outside Australia and 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 each individual's circumstances.

We consider that your circumstances are consistent with you residing in Australia according to ordinary concepts.

This is evident from the following:

•         You have been in Australia for the whole of the 2021 income year.

•         You are currently undergoing treatment for a serious illness in Australia.

•         You are living in a property owned by a related entity.

•         Your spouse and child have joined you in Australia.

•         Your spouse has been granted a permanent 801 visa.

•         Your child is enrolled in school in Australia.

•         You are not able to leave Australia to return to Country Z due to your health.

The Commissioner is satisfied that your routine and mode of life is consistent with someone residing in Australia.

You are a resident under this test.

Domicile test

Under the domicile test, you are a resident of Australia if your domicile is in Australia unless the Commissioner is satisfied that your permanent place of abode is outside Australia.

Domicile

Whether your domicile is Australia is determined by the Domicile Act 1982 and the common law rules on domicile.

Your domicile is your domicile of origin (usually the domicile of your father at the time of your birth) unless you have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and you must hold the positive intention to make that country your home indefinitely.

Your domicile continues until you acquire a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

You were born in Country Y and you are a citizen of Australia. Your domicile of choice is therefore Australia as you have not changed your domicile.

Permanent place of abode

If you have an Australian domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place of abode is outside Australia. This is a question of fact to be determined in light of all the facts and circumstances of each case.

'Permanent' does not mean everlasting or forever, but it is to be distinguished from temporary or transitory.

The courts have held that the phrase 'permanent place of abode' calls for a consideration of the town or country where a person is located. It does not extend to more than one country, or a region of the world.

The Full Federal Court in Harding v Commissioner of Taxation [2019] FCA 29 held at paragraphs 36 and 40 that key considerations in determining whether a taxpayer has his or her permanent place of abode outside Australia are:

(a)  whether the taxpayer has definitely abandoned, in a permanent way, living in Australia; and

(b)  whether the taxpayer is living permanently in a specific country.

Paragraph 23 of Taxation Ruling IT 2650sets out the following factors which are used by the Commissioner in reaching a state of satisfaction as to a taxpayer's permanent place of abode:

(a)   the intended and actual length of the taxpayer's stay in the overseas country;

(b)   whether the taxpayer intended to stay in the overseas country only temporarily and then to move on to another country or to return to Australia at some definite point in time;

(c)   whether the taxpayer has established a home (in the sense of dwelling place; a house or other shelter that is the fixed residence of a person, a family, or a household), outside Australia;

(d)   whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence;

(e)   the duration and continuity of the taxpayer's presence in the overseas country; and

(f)    the durability of association that the person has with a particular place in Australia, i.e. maintaining assets in Australia, informing government departments such as the Department of Social Security that he or she is leaving permanently and that family allowance payments should be stopped, place of education of the taxpayer's children, family ties and so on.

As with the factors under the resides test, no one single factor is decisive, and the weight given to each factor depends on the individual circumstances.

The Commissioner is not satisfied that you have a permanent place of abode outside Australia.

•         You have been living outside Australia since XXXX.

•         You are married and live in Country Z.

•         You have a child with your spouse in Country Z.

•         You and your spouse are building a new home in Country Z.

•         You do not intend on being in Australia on a permanent basis.

•         You will return to Country Z as soon as your health allows.

You are not a resident under this test.

183-day test

Where a person is present in Australia for 183 days during the year of income the person will be a resident, unless the Commissioner is satisfied that the person's usual place of abode is outside Australia, and the person does not intend to take up residence in Australia.

You were in Australia for more than 183 days in the 2021 income year.

The Commissioner is satisfied that for the 2021 income year you do not intend on taking up permanent residency in Australia and your usual place of abode is in Country Z.

Superannuation Test

An individual is a resident of Australia if they are either a member of the superannuation scheme established by deed under the Superannuation Act 1990 or an eligible employee for the purposes of the Superannuation Act 1976, or they are the spouse, or the child under 16, of such a person.

You and your spouse are not a contributing member of the Public Sector Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS) or a spouse of such a person, or a child under 16 of such a person.

You are not a resident under this test.

Conclusion

You are a resident of Australia for taxation purposes for the 20XX income year.

Question 2

Capital gains tax (CGT) is the tax you pay on certain capital gains you make. You make a capital gain or a capital loss when a 'CGT event' happens. The most common CGT event A1 happens when you dispose of the asset to another party, for example the disposal of a property. For most CGT events, your capital gain is the difference between your capital proceeds and the cost base of your CGT asset.

Section 855-45 of the ITAA 1997 sets out the CGT consequences of a foreign resident individual becoming

an Australian resident. If an individual becomes an Australian resident then, for each CGT asset that was owned just before the individual or company became an Australian resident (except an asset that is taxable Australian property or an asset that was acquired before 20 September 1985):

1)    the asset is taken to have been acquired by the individual at the time of becoming an Australian resident, and

2)    the first element of the cost base and reduced cost base of the asset at the time of becoming an Australian resident is its market value at that time.

This provision is designed to ensure that gains which accrued on those assets while the person was a foreign resident will be excluded from the CGT provisions.

There are five categories of CGT assets that are taxable Australian property. The categories are set out in the table in section 855-15 of the ITAA 1997 as follows:

As you acquired your shares in the company when you were a non-resident of Australia for taxation purposes and the company does not own any Australian real property you are taken to have acquired the shares in the company for their market value on the day you became a resident of Australia for taxation purposes.