Edited version of private advice

Authorisation Number: 1052249648315

Date of advice: 22 May 2024

Ruling

Subject: Residency - employee share scheme and options

Question 1

Did you cease to be a resident of Australia for taxation purposes following your permanent relocation to XXX?

Answer

Yes.

Question 2

Will shares acquired in the companies be considered taxable Australian property when you are a non-resident at the time the options are exercised?

Answer

No.

Question 3

Will you be entitled to disregard the capital gain or loss under section 855-10 of the ITAA 1997 on the disposal of the shares which were granted under the qualifying 'Start-Up' Employee Share Scheme?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June XXX

Year ending 30 June XXX

Year ending 30 June XXX

Year ending 30 June XXX

The scheme commenced on:

XXX

Relevant facts and circumstances

You are a citizen of Australia.

You permanently relocated to XXX on XXX.

You entered into an employment contract with XXX, a company located in XXX.

The term of the employment contract is three years, with an automatic renewal period of another term or as agreed.

You do not intend to return to Australian.

Your partner will be permanently relocating to XXX.

You do not have any dependents in Australia.

You have received a residency permit to work and live in XXX.

You have long term accommodation in XXX.

Your personal belongings have been shipped to XXX.

You resigned/initiated resignation as an Australian Director to all associated entities.

Your Australian private health insurance policy has been cancelled.

You do not have an existing Public Service Superannuation Scheme or Commonwealth Superannuation Scheme account.

You will cancel your Australian income protection policy.

You have advised the Australian Electoral Roll of your permanent relocation to XXX.

Your two investment properties located in Australia which will be managed by a property manager in Australia.

You maintained an Australian bank account specifically for the management of the investment property located in Australia.

You intend to spend less than 4 weeks in any year in Australia.

You intend to disregard CGT even I1, when ceasing to be an Australian resident.

You have Shares and Options in Australian companies.

Your Options were all granted under the respective companies Employee Option Plans.

The companies advised you that the plans all qualify for the 'Start-Up' ESS concessions.

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

The XXX Options under the XXX plan are fully vested but not yet exercised.

You intend to exercise the Options and eventually sell the Shares while residing in XXX.

You will own less than 10% interest in the XXX Australian entity after various Options are exercised.

XXX is not an Australian Government agency.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 subdivision 83A-B

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 section 104-165

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

Income Tax Assessment Act 1997 section 855-10

Reasons for decision

Question 1

Did you cease to be a resident of Australia for taxation purposes following your permanent relocation to XXX?

Residency

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.

Only one of the tests needs to be met for an individual to be a resident of Australia for tax purposes.

Our interpretation of the law in respect of residency is set out in Taxation Ruling TR 2023/1 Income tax: residency tests for individuals.

The resides 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'.

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 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 resides test is about 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. The ordinary meaning of reside does not require an individual to have a principle or usual place of residence in Australia.

Application to your situation

In your case, you have relocated to another country with your partner for an indefinite period of time and will establish a home in that country. You will only make minimal return visits to Australia.

Therefore, you are no longer residing in Australia and are not a resident of Australia under this test.

The 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 are a citizen of Australia and it is too early to say your domicile has changed to any other county.

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:

•         the intended and actual length of the taxpayer's stay in the overseas country

•         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

•         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

•         whether any residence or place of abode exists in Australia or has been abandoned because of the overseas absence

•         the duration and continuity of the taxpayer's presence in the overseas country

•         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

In your case, you have relocated to another country with your spouse for an indefinite period of time and will establish a home in that country. You will only make minimal return visits to Australia.

Consequently, the Commissioner is satisfied that you will have a permanent place of abode outside of Australia.

Therefore, you are not a resident of Australia under this test.

The 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

Although you spent more than 183 days in Australia during the XXX financial income year, the Commissioner is satisfied that from when you relocated to XXX, your usual place of abode is outside of Australia and you have no intention of taking up residence in Australia.

You will not be a resident under this test for any of the other relevant years as you will not be present in Australia for more than 183 days in any of those years.

You are not 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.

You are not a resident under this test.

Residency Conclusion

As you do not satisfy any of the four tests of residency, you are not a resident of Australia for income tax purposes from XXX to the XXX.

Question 2

Will shares acquired in the companies be considered taxable Australian property when you are a non-resident at the time the options are exercised?

Question 3

Will you be entitled to disregard the capital gain or loss under s855-10 of the ITA 1997 on the disposal of the shares which were granted under the qualifying 'Start-Up' Employee Share Scheme?

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).

In your case, you held options when you ceased 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 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.

In your case, you intend to disregard CGT event I1 when lodging your Australian income tax return. As a result:

• The options are taken to be taxable Australian property
• When the options are exercised, CGT event C2 occurs but is disregarded under subsection 134-1(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 you are a foreign resident is disregarded under section 855-10 of the ITAA 1997.