Edited version of private advice

Authorisation Number: 1052056477984

Date of advice: 10 November 2022

Ruling

Subject: GST and sale of a property

Questions

1.    Having been overseas how long would you have to remain in Australia before you sell your property and avoid paying additional taxes/CGT?

2.    Whether GST will be payable on the sale of your property (the Property)?

Answers

1.    If you dispose of the property when your Australian residency status is reattained and if you are eligible for the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997), you would not be liable for CGT on the proceeds from the sale.

2.    No.

Relevant facts and circumstances

•         You are an Australian citizen (dual citizen with Country A) and lived and worked in Melbourne for many years.

•         You are not registered for GST.

•         You bought a new Property in 20XX. The Property is a residential apartment.

•         You lived in the Property from 20XX to 20XX.

•         You have not undertaken any renovations to the Property since you purchased it.

•         You have been paying the mortgage, council rates, body corporate fees and bills for the Property and have not been renting the property out.

•         You have kept your personal belongings in the Property.

•         You went to Country A in early 20XX for family reasons and are now in a position that you have an aging family in Country A and are finding it very hard to go back to Australia because of this. You feel that it is too hard to go back to Australia to live permanently due to your family in Country A.

•         You are planning to sell the Property to free you up from mortgage and associated bills. As you are an Australian citizen, you have the option in the future to return to Australia. However, you feel now is the time to be with your family in Country A.

•         You are currently working from home as a nurse assessor with a Country A company. You have recently commenced with them and therefore it is not the right time to discuss with them any plans to return to Australia.

Relevant legislative provisions

A New Tax System (Goods and Services Tax) Act 1999 Section 9-5

A New Tax System (Goods and Services Tax) Act 1999 Section 40-65

A New Tax System (Goods and Services Tax) Act 1999 Section 195-1

Reasons for decision

Question 1

Summary

If you dispose of the property when your Australian residency status is reattained and if you are eligible for the main residence exemption under section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997), you would not be liable for CGT on the proceeds from the sale.

Capital Gains Tax (CGT)

A capital gain or loss will occur where a CGT asset is subject to a CGT event, and the capital proceeds from the event are greater than or less than the applicable cost base, respectively.

CGT event A1, the disposal of a CGT asset subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), takes place where a change of ownership occurs from the taxpayer to a different entity.

The time of the event is taken to occur when any contract for the disposal is entered into, or where there is no contract, when the change of ownership occurs.

CGT assets are defined in subsection 108-5(1) of the ITAA 1997. The definition is very broad and states that a CGT asset is (a) any kind of property; or (b) a legal or equitable right that is not property. Subsection 108-5(2) specifies that the following are CGT assets:

•         part of, or an interest in, any assets covered by items (a) or (b) above;

•         goodwill or an interest in it;

•         an interest in an asset of a partnership; and

•         an interest in a partnership other than an interest in an asset of a partnership.

Specific examples of CGT assets include land and buildings. Real estate acquired on or after 20 September 1985 is a CGT asset.

In your case, your residential unit is a CGT asset and when you sell it a CGT event A1 will occur.

Main residence exemption

Subdivision 118-B of the ITAA 1997 contains the rules for applying the CGT main residence exemption to the disposal of a property used as your main residence.

As a general rule, the main residence exemption can only be applied to one dwelling at a time and if you own and occupy more than one dwelling in a particular period of time, you must choose which dwelling the main residence exemption will apply to. You make this choice in the income year in which the CGT event happens to the property you wish the exemption to apply to.

Section 118-110 of the ITAA 1997 provides that the following conditions must be met to qualify for a full main residence exemption (a partial exemption may be available in cases where any of the conditions are not met):

•         the dwelling must have been your home for the whole period you owned it,

•         you must not have used the dwelling (or the land on which it is situated and adjacent to) to produce assessable income, and

•         the land on which the dwelling is situated must be 2 hectares or less.

Absence choice - Continuing to treat a dwelling as your main residence after it ceases to be your main residence

In some circumstances you may choose to have a dwelling treated as your main residence even though you ceased to use it as such (subsection 118-145(1) of the ITAA 1997.) This is called the "absence rule". Under the absence rule, if the dwelling is not being used for income-producing purposes during the taxpayer's absence, this choice can apply indefinitely. Otherwise, the maximum period that the dwelling can be treated as a main residence is 6 years. The taxpayer may be subject to a capital gain if the 6-year period is exceeded - that is, a partial main residence exemption would be available.

You can continue to treat the dwelling as your main residence where you meet the following criteria:

(a)          At any time either:

•         You use the part of the dwelling that was your main residence for the purpose of producing assessable income (for example renting it out); up to a maximum of six years at any one time.

•         If you do not use the dwelling that was your main residence for the purpose of producing assessable income but leave it vacant, then you can extend the exemption indefinitely.

(b)          You do not treat any other dwelling as your main residence for the time you are applying the extension.

(c)           You make the necessary election(s) for the extension of the main residence period to that property. The election must be made either by the time you lodge your income tax return for the income year in which the relevant CGT event occurred or within such further time that the Commissioner allows.

In your case, you left Australia and your residence in December 20XX to travel overseas and visit family. You did not rent out your property and left it vacant instead with all of your belongings. You intended to remain overseas for a temporary period only while visiting your family in Country A. You left Australia in December 20XX, however, due to family reasons and Covid travel restrictions you extended your travel and remained in Country A still until 20XX. Since January 20XX, you lived with your parent who was unwell and has since passed away. You commenced temporary employment in Country A as a nurse to support yourself but continued to make superannuation contributions to your Australian superannuation fund. You intend to move back in Australia in the future but intend to remain with your extended family in the coming years and wish to sell your house in Australia.

In accordance with the absence choice rule under subsection 118-145(1) of the ITAA 1997, you would have been entitled to the main residence exemption on the sale of your property indefinitely if you haven't rented it out or if sold within 6 years of being used to earn assessable income. However, with effect from 7.30 pm (AEST) on 9 May 2017, the main residence exemption is no longer available to individuals who sold their property after 30 June 2020 and at the time of the sale, are either:

(a)  an "excluded foreign resident" - being a foreign resident that has been a foreign resident for a continuous period of more than 6 years, or

(b)  a foreign resident that does not satisfy the "life events test" (s 118-110(3) and (4) of ITAA 1997).

The life events test considers your circumstances for remaining overseas with regards to an immediate family like a spouse or dependent child but do not include parents or other extended family. Basically, a taxpayer must have been a foreign resident for 6 years or less and satisfies one of the following:

•         the taxpayer or taxpayer's spouse or child under 18 years has had a terminal medical condition during that period of foreign residency

•         either the taxpayer's spouse or child under 18 years dies during that period of foreign residency

•         the CGT event happens because of the taxpayer's divorce or separation (s 118-110(5)).

The effect of these rules is that the main residence exemption will no longer be available for Australians going overseas who sell their main residence at the time they are a foreign resident and a "life event" does not occur. In your case, the illness and subsequent passing of your parent, however, would not qualify for a "life event", which is only intended for immediate family. Therefore, if you sell the property while living in Country A you would not be eligible for the main residence exemption and would have to pay CGT.

As the rules apply only to those who trigger a CGT event whilst a foreign resident, where an individual returns to Australia and resumes Australian tax residency before entering into a contract of sale, they may still be able to claim the main residence exemption (and apply the absence rule) in relation to the entire period of ownership, including the period of foreign residence.

Therefore, in your case, if you return to Australia and reattain your Australian tax residency you may be eligible for the full main residence CGT exemption on the sale of your residence.

That is, if you sell the property as an Australian resident, you would be eligible to claim the CGT main residence exemption for the period you resided in Australia and apply the absence choice provision in 118-145(1) of the ITAA 1997 for the period you were living and working in the Country A.

Therefore, it is important to consider your residence status at the time of the sale of your property.

The following is some general guidance regarding residency, which you need to consider in the year you dispose of your property.

Tax Residency Tests

The term resident of Australia, as it applied to an individual, is defined in subsection 6(1) of the Income Tax Assessment Act 1936 (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.

1.    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'.

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 Residency - Permanent place of abode outside Australia (IT 2650) 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.

2.    Domicile test

Under the domicile test, the Taxpayer is a resident of Australia if the domicile is in Australia unless the Commissioner is satisfied that the Taxpayer's permanent place of abode is outside Australia.

Domicile

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

An individual's domicile is their domicile of origin (usually the domicile of their father at the time of their birth) unless they have acquired a domicile of choice elsewhere. To acquire a domicile of choice of a particular country they must be lawfully present there and must hold the positive intention to make that country their home indefinitely. A domicile continues until they acquire a different domicile. Whether an individual's domicile has changed depends on an objective consideration of all relevant facts.

Permanent place of abode

If an individual has an Australian domicile, they are an Australian resident unless the Commissioner is satisfied that their 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 an individual has his or her permanent place of abode outside Australia are:

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

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

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

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

(b)  whether the individual 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 individual 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 individual's presence in the overseas country; and

(f)    the durability of association that the individual 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 individual'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.

3.    183-day test

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

In the context of the 183-day test, an individual's usual place of abode can include both a dwelling or a country where the person usually resides. An individual can have only one usual place of abode under the 183-day test. However, it is also possible that an individual does not have a usual place of abode. This is the individual who merely travels through various countries without developing any strong connections.

4.    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.

More information including examples about Australian and foreign residents is available on our website www.ato.gov.au, refer to QC 17141.

Question 2

Summary

No. The sale of the Property by you will not be subject to GST.

The sale would be a subject to GST if it satisfies the requirements under section 9-5 of the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). That is, you make a taxable supply (sale) if:

(a)  you make the supply for consideration; and

(b)  the supply is made in the course or furtherance of an enterprise that you carry on; and

(c)   the supply is connected with Australia; and

(d)  you are registered or required to be registered.

However, the supply is not a taxable supply to the extent that it is GST-free or input taxed.

Your sale of the property would not meet the requirements of paragraph 9-5 of the GST Act.

Examples of an enterprise include buying property with the immediate resale at profit or developing property to sell. You are paying Council rates, the annual body corporate fees and the bills for your home. Your personal belongings remain in this unit. Your sale would not be in the course or furtherance of an enterprise, it would be a private sale of your residence. Further you are not registered for GST.

Subsection 40-65(1) of the GST Act provides that a sale of real property is input taxed, but only to the extent that the property is residential premises to be used predominantly for residential accommodation (regardless of the term of occupation).

However, subsection 40-65(2) of the GST Act provides that the sale is not input taxed to the extent that the residential premises are:

(a)        commercial residential premises; or

(b)        new residential premises other than those used for residential accommodation (regardless of the term of occupation) before 2 December 1998.

Your residential premises are not commercial residential premises as they are not run in a similar style to a hotel, motel, hostel, boarding house etc. and as you purchased the apartment and have not made any substantial renovations to the apartment it is also not new residential premises. Therefore, the sale would meet the requirements of being input taxed. Input-taxed sales are sales of goods and services that don't include GST in the price and GST credits can' be claimed.

Therefore, as the requirements of section 9-5 of the GST are not satisfied to make the sale a taxable supply, there would be no GST on the sale.