Edited version of private advice

Authorisation Number: 1051997306592

Date of advice: 24 June 2022

Ruling

Subject: Residency

Question 1

Will you cease to be a resident of Australia for taxation purposes following your permanent relocation to country A in 20XX?

Answer

Yes.

Question 2

Will any capital gain (or loss) made from the disposal of your shares in company X which were granted under a qualifying 'Start-up' Employee Share Scheme be disregarded where you are a non-resident at the time of disposal of the shares?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

Year ending 30 June 20XX

The scheme commences on:

1 July 20XX

Relevant facts and circumstances

You were born in Australia.

You are a citizen of Australia.

You will relocate from Australia to country A permanently in 20XX.

You have accepted a permanent employment offer with a foreign company.

You are applying for a Skilled Worker Visa which is sponsored by your foreign employer.

Your visa is not permanent but may be extended.

You intend to extend the visa or apply for country A citizenship to remain residing in that country.

You do not intend to return to Australia to live.

You intend to spend less than 2 weeks each income year in Australia following your relocation.

You do not have a spouse.

You do not have any dependents.

You do not own any real properties in Australia.

You will end your Australian residential lease prior to departure.

You will rent long-term accommodation in country A.

Your personal belongings will be shipped to country A.

You own shares in Australia and have cash in your Australian bank account.

You will notify your Australian bank that you will be living in country A.

You will advise the Australian Electoral Roll that you will be residing in country A.

You will inform Medicare that you will be residing in country A.

You are not eligible to contribute to the Public Service Superannuation Scheme (PSS) or the Commonwealth Superannuation Scheme (CSS).

You are currently employed by company X.

You participated in the company X Employee Option Plan (Plan).

Company X has advised you that the Plan qualifies for the 'Start-Up' Employee Share Scheme (ESS) concession.

Under the Plan, you were granted options.

All options under the Plan are now fully vested but not yet exercised.

You will exercise the options within the next 12 months and eventually sell the shares while you are residing in country A.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 Subsection 134-1(4)

Income Tax Assessment Act 1997 Section 115-30

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 855-10

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 (also referred to as the ordinary concepts test)

•         the domicile test

•         the 183-day test, and

•         the Commonwealth superannuation fund test.

The resides test is the primary test for deciding the residency status of an individual. This test considers whether an individual resides 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 domicile test, 183-day test and Commonwealth superannuation fund test).

Our interpretation of the law in respect of residency is set out in Taxation Ruling IT 2650 Income tax: residency - permanent place of abode and Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia.

We have considered the statutory tests listed above in relation to your situation as follows:

The resides test

The ordinary meaning of the word 'reside' has been expressed as 'to dwell permanently or for a considerable time, to have one's settled or usual abode, to live, in or at a particular place': See Commissioner of Taxation v Miller (1946) 73 CLR 93 at 99 per Latham CJ, citing Viscount Cave LC in Levene v Inland Revenue Commissioners [1928] AC 217 at 222, citing the Oxford English Dictionary. Likewise, the Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

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.

The Commissioner considers the following factors in relation to whether a taxpayer is a resident under the 'resides' test:

•         period of physical presence in Australia

•         intention or purpose of presence

•         behaviour while in Australia

•         family and business/employment ties

•         maintenance and location of assets

•         social and living arrangements.

It is important to note that no one single factor is decisive, and the weight given to each factor depends on each individual's circumstances.

Because the ordinary concepts test is whether an individual resides in Australia, the factors focus on the individual's connection to Australia. Having a connection with another country, or being a resident of another country, does not diminish any connection to Australia: Logan J in Pike v Commissioner of Taxation [2019] FCA 2185 at 57 reminds us that 'it is no part of the ordinary meaning of reside in the 1936 Act that there be a "principal" or even "usual" place of residence. ... It is important that ... "resident" not be construed and applied as if there were such adjectival qualifications.' For this reason, the test is not about dominance or exclusivity.

Application to your situation

We have taken the following into consideration when determining whether you meet the resides test:

•         You will relocate to country A permanently

•         You will be employed permanently in country A.

•         You do not own any real properties in Australia.

•         You will end your Australian residential lease prior to your relocation.

•         You will rent long-term accommodation in country A.

•         Your personal belongings will be shipped to country A.

You will not be a resident of Australia under the resides test following your permanent relocation to country A.

You may still be an Australian resident if you meet the conditions of one of the other tests (the domicile test, 183-day test and Commonwealth superannuation fund 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 in 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 a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country you must be lawfully present there and 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.

Application to your situation

In your case, you were born in Australia and your domicile of origin is Australia.

It is considered that you will not abandon your domicile of origin in Australia and acquire a domicile of choice in UK as your country A visa does not allow you to stay in country A permanently.

Therefore, your domicile is Australia.

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 phrase 'permanent place of abode' calls for a consideration of the physical surroundings in which you live, extending to a town or country. 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 their permanent place of abode outside Australia are:

•         whether the taxpayer has definitely abandoned, in a permanent way, living in Australia

•         whether the taxpayer is living in a town, city, region or country in a permanent way.

The Commissioner considers the following factors relevant to whether a taxpayer's permanent place of abode is outside Australia:

(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.

Application to your situation

We have taken the following into consideration when deciding whether your permanent place of abode is outside Australia:

•         You will relocate to country A permanently

•         You will be employed permanently in country A.

•         You will end your Australian residential lease prior to your departure.

•         You will rent long-term accommodation in country A.

•         You intend to spend limited time in Australia following your relocation (less than 2 weeks).

The Commissioner is satisfied that your permanent place of abode will be outside Australia.

Therefore, you will not be a resident of Australia under the domicile test.

183-day test

Where a person is present in Australia for 183 days or more during the year of income the person will be a resident, unless the Commissioner is satisfied that both:

•         the person's usual place of abode is outside Australia, and

•         the person does not intend to take up residence in Australia.

Application to your situation

You will not be present in Australia for 183 days or more.

Therefore, you will not be a resident under this test.

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.

Application to your situation

You are not a member on behalf of whom contributions are being made to 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. Therefore, you will not be a resident under this test.

As you do not satisfy any of the four tests of residency, you will not be a resident of Australia following your permanent relocation to country A.

Question 2

Employee share scheme interests and ceasing tax residency

Generally, a discount you receive on shares, rights or stapled securities you acquire under an Employee Share Scheme (ESS) is included in your assessable income when you acquire the beneficial interest in those shares, rights or securities.

However, subdivision 83A-B of the ITAA 1997 provides concessions for 'start-up' companies if certain conditions laid out in the subdivision are met.

Under the start-up rules, the discount on eligible ESS interests is not taxed under the ESS regime; instead, any gain or loss on disposal of the rights or shares is assessed under the capital gains tax regime.

When an ESS option is exercised, CGT event C2 occurs but may be disregarded under subsection 134-1(4) of the ITAA 1997 (subject to certain conditions).

When working out if the 50% CGT discount applies, the period of ownership of a share acquired on exercise of a right is taken to have started when the right was acquired (subsection 115-30(1)(9A) of the ITAA 1997).

In your case, you hold options under the company X Plan when you cease to be a tax resident of Australia.

CGT event I1 happens when a taxpayer stops being a tax resident of Australia. The taxpayer is required to work out if they have made a capital gain or a capital loss for each CGT asset owned just before the time of the event, ie for each asset owned just before the taxpayer ceased to be an Australian resident - apart from assets that are taxable Australian property (section 104-160 of the ITAA 1997).

However, an individual can choose to disregard making a capital gain or loss from the CGT assets covered by CGT event I1 (the choice can only be made for all assets owned). If he or she so chooses each of those assets is taken to be taxable Australian property until the earlier of:

a)    a CGT event happening in relation to the asset, and

b)    the individual again becoming an Australian resident (section 104-165 of the ITAA 1997).

The choice is made when lodging the income tax return for the relevant income year.

Section 855-10 of the ITAA 1997 provides that a capital gain or loss from a CGT event is disregarded 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.

Consequences for you of holding options when CGT event I1 happens

•         On ceasing tax residency, work out the amount of any capital gain or loss on the options

•         If the options are disposed of in the future (not exercised) when a non-resident, any capital gain or loss would be disregarded under section 855-10 of the ITAA 1997 as the options are not taxable Australian property

•         After the options are exercised and shares acquired, any capital gain or loss on the subsequent disposal of the shares while a non-resident is disregarded under section 855-10 of the ITAA 1997 as the shares are not taxable Australian property.

Consequences for you of holding options when CGT event I1 is disregarded

•         The options are taken to be taxable Australian property

•         If the options are subsequently disposed of (not exercised), any capital gain or loss cannot be disregarded as the options are taxable Australian property

•         If the options are exercised, CGT event C2 occurs but is disregarded under subsection134-1(4) of the ITAA 1997

•         After the options are exercised and shares acquired, the shares are not taken to be taxable Australian property. Therefore, any capital gain or loss on the subsequent disposal of the shares while a non-resident is disregarded under section 855-10 of the ITAA 1997.