Edited version of private advice

Authorisation Number: 1052302276828

Date of advice: 01 October 2024

Ruling

Subject: CGT - residency

Question 1

Did you cease to be an Australian resident for tax purposes on XX August 20XX for the purposes of section 6 of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer 1

Yes

Question 2

Did you make a choice to disregard making a capital gain or loss from all CGT assets when you ceased your Australian residency for the purposes of section 104-165 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer 2

Yes

Question 3

Will the exercise of the options in Company A be disregarded for the purposes of section 134-1 of the ITAA 1997?

Answer 3

Yes

Question 4

Will any capital gain or loss made from the disposal of shares acquired from the options granted by Company A be disregarded when you are a non-resident for the purposes of section 855-10 of the ITAA 1997?

Answer 4

Yes

This ruling applies for the following periods:

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You migrated from Foreign Country A to Australia.

You are a dual citizen of Foreign Country A and Australia.

On XX August 20XX, you, and your family relocated to Foreign Country B.

You owed a property in Australia, which was sold in August 20XX.

Your household and personal effects were shipped to Foreign Country B on XX July 20XX.

You do not own any other property in Australia and do not have accommodation available to you in Australia.

You sold your Australian motor vehicles on XX August 20XX.

You ceased employment with Company A in June 20XX, while being on parental leave.

You have bank accounts (checking, savings and foreign currency term deposits) still open in your absence.

You registered as an Overseas Elector with the Australian Electoral Roll.

You have advised Medicare of your overseas relocation.

You have ceased memberships when you left Australia.

You have suspended your private health insurance in Australia.

You have Superannuation in Australia.

Your Circumstances in Foreign Country B

You have permission to stay in Foreign Country B under the Immigration Rules which is valid until XX February 20XX with a renewal option for X years.

You relocated to the Foreign Country B to be closer to your father in-law who was experiencing a serious health condition.

You have taken employment with a foreign employer, since April 20XX.

You have a Foreign Country B bank account.

You purchased a motor vehicle in Foreign Country B.

On XX May 20XX, you have settled and moved into your residence in Foreign Country B.

You joined the Local Library in September 20XX.

You joined the Leisure Centre in January 20XX.

Your children have commenced school since XX September 20XX.

Your return to Australia

Following your departure on XX August 20XX you returned to Australia on XX September 20XX and left Australia on XX September 20XX.

You have not returned to Australia following your departure in September 20XX.

You do not intend to return to Australia to live in the foreseeable future.

Options in Company A

During your employ with Company A you participated in the 20XX Employee Start Up Share Option Plan (The plan). The plan qualified for the 'Start-Up' Employee Share Scheme Concession under the ITAA 1997.

Company A provided you with a total of XX options to purchase shares under the plan. All options under the plan have fully vested as at XX July 20XX.

You exercised these options in July 20XX following ceasing Australian residency. You have not yet sold any of the shares obtained from the exercise of the options.

You intend to sell the shares while you are a non-resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1936 subsection 6(1)

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 section 104-165

Income Tax Assessment Act 1997 section 134-1

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 995-1

Does IVA apply to this private ruling?

Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement.

If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidancerule for income tax'.

Question 1

Did you cease to be an Australian resident for tax purposes on XX August 20XX for the purposes of section 6 of the ITAA 1936?

Answer 1

Yes

Detailed reasoning

Section 995-1 of the ITAA 1997 defines an Australian resident for tax purposes as a person who is a resident of Australia for the purpose of ITAA 1936.

The term 'resident' and 'resident of Australia', as applied to an individual are defined in subsection 6(1) of the ITAA 1936.

The definition offers four alternative tests for residency of individuals 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 Commonwealth superannuation fund test.

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

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. Similarly, The Macquarie Dictionary defines 'reside' as 'to dwell permanently or for a considerable time; have one's abode for a time'.

Physical presence and intention will coincide for most of the time. Once a person has established a home in particular place, a person does not necessarily cease to be resident there because he or she is physically absent. The question is whether they have maintained a 'continuity of association' with Australia which is in turn established by considering their other connections to Australia.

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, and

•                     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 circumstances.

As 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 dimmish any connection to Australia.

Application to your situation

You are not a resident of Australia under the resides test from XX August 20XX based on the following:

During this period:

•                     You departed Australia on XX August 20XX and have permanently resided in foreign country B since.

•                     You sold your Australian Property in August 20XX.

•                     Your household and personal effects were shipped to foreign country B on XX July 20XX.

•                     You sold your Australian Motor Vehicles on XX August 20XX.

•                     You have remained in foreign country B, other than short trips for either work or holiday purposes.

•                     You purchased your foreign country B property on XX May 20XX, while staying with friends/family and renting accommodation from XX August 20XX to XX May 20XX.

•                     You ceased memberships when you left Australia.

•                     You registered as an Overseas Elector with the Australian Electoral Roll.

•                     You advised Medicare of your overseas relocation.

•                     You have permission to stay in foreign country B until XX February 20XX with a X year renewal.

•                     You purchased a foreign country B motor vehicle on XX July 20XX.

•                     You returned to Australia between the period of XX September 20XX to XX September 20XX.

•                     Your physical presence in Australia, intention, and behaviour during the period from XX August 20XX supports and is consistent with your intention to live in foreign country B.

The fact that you moved all your personal and household effects to foreign country B, sold your Australian Property and purchased assets in foreign country B, ceased memberships in Australia and set up local memberships in foreign country B is consistent behaviour to indicate an intention and purpose to resides outside of Australia from the XX August 20XX. Your intention to remain in foreign country B for the foreseeable future is evident within your behaviour of setting up your residence and children in school, while also creating social, family and employment ties in foreign country B.

While you had returned to Australia for a X day period between XX September and XX September 20XX, you had immediately left following this and the circumstances of the ceremony are not determinative in making a decision on residency. You have provided that you have no intention of remaining in Australia as you have not returned since.

This intention and behaviour combined with your limited physical presence in Australia and your limited family, social and employment ties since your relocation indicates you had shifted your life to foreign country B from the XX August 20XX.

You are a resident of Australia until XX August 20XX based on the following:

•                     You owned a property in Australia until August 20XX.

•                     You and your family resided in Australia until XX August 20XX.

•                     You had employment with Company A until June 20XX.

•                     You have an Australian Superannuation fund.

•                     You had an Australian Private Health Insurance.

•                     You have Australian Bank Accounts still open in your absence.

•                     You were a member of social memberships in Australia until August 20XX.

Until your relocation on the XX August 20XX, you are a resident under the resides test due to your physical presence, behaviour, intention, family ties and social and living arrangement being consistent with someone who is a resident.

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.

Your domicile it is governed by common law as modified by the Domicile Act 1982.

Your domicile is your domicile of origin unless you have a domicile of dependence or have acquired a domicile of choice elsewhere. To acquire a domicile of choice you would have both lawful physical presence in a foreign country and an intention to make your home indefinitely in that country. Your domicile continues until you have acquired a different domicile. Whether your domicile has changed depends on an objective consideration of all relevant facts.

Application to your situation

You were born in foreign country A and your domicile of origin is foreign country A. You migrated to Australia and subsequently became an Australian citizen on XX September 20XX.

We consider that you abandoned your domicile of origin in foreign country A and acquired a domicile of choice in Australia. You obtained a dual citizenship in Australia and foreign country A, this enabled you to remain in either country indefinably, however for some time you and your family chose to live in Australia, establishing a life in Australia and acquired a home. Therefore, for this period you changed your domicile of choice.

On XX August 20XX, you relocated to foreign country B and have stayed there since, except on short trips for work and holiday purposes. You have obtained permission to stay in foreign country B under the immigration rules until XX February 20XX, at which point can be renewed for another X years. You have also, purchased a foreign country B property which has become your family residence. You have also purchased a foreign country B motor vehicle, your children are enrolled in school and you have also joined local memberships.

This conduct and behaviour are consistent to have the intention to make your home indefinite in foreign country B, while having a lawful physical presence in foreign country B. This combined with limited to no physical presence in Australia since your relocation indicates you have abandoned your domicile of choice in Australia. Therefore, since XX August 20XX you changed your domicile of choice to foreign country B.

Permanent place of abode

If you have an Australian Domicile, you are an Australian resident unless the Commissioner is satisfied that your permanent place abode is outside Australia. This is a question that is determined with all relevant facts and circumstances of each case.

The word 'permanent' does not mean everlasting or forever but is used in sense of being contrasted from temporary or transitory.

Where the phrase 'place of adobe' refers to the physical surroundings in which your live, extending to a town or country. It does not extend to more than one country or region of the world.

In Harding v Commissioner of Taxation [2019] FCA, paragraphs 36 and 40 outline key considerations in determining whether a taxpayer has their permanent place of abode outside Australia being:

•                     whether the taxpayer has abandoned their residency in Australia, and

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

Application to your situation

The Commissioner is satisfied that your permanent place of abode was outside Australia from XX August 20XX because:

•                     Your intention is to remain in foreign country B for at least X years since your relocation and have gained permission to stay in foreign country B until XX February 20XX with a possibility of renewal for X years.

•                     You established a permanent place of residence in foreign country B by purchasing your foreign country B property on XX May 20XX.

•                     You have sold your Australian Property and had your household and personal effects shipped to foreign country B.

•                     You have sold your Australian Motor Vehicles on XX August 20XX.

•                     You have remained on the Australian Electoral Roll as an overseas elector and got election papers sent to your foreign country B property.

•                     You have informed Medicare of your overseas relocation.

•                     You have suspended your private health insurance.

•                     The place of abode refers to the physical surroundings in which your live, extending to a town or country.

However, satisfying this definition does not indicate one permeant place abode, where other factors of length overseas stay, nature of accommodation and durability or association combined with intention, conducted and objective connections must be considered.

Your length of overseas stay, nature of accommodation and durability of association in foreign country B describes someone who has abandoned Australia as a place of residency and commenced living permanently overseas. You set up a residence in the foreign country, live there with your family and only returned for a total of X days since your relocation, and have the intention to remain in foreign country B for at least X years in total. You have also limited your association with Australia by selling your property, having no social or family ties remaining in the country while establishing associations within foreign country B by joining local memberships, children starting school, moving closer to family, and purchasing assets like a motor vehicle and property.

All these factors, combined with your intention and conduct indicates that you have abandoned your residency in Australia and commenced living permanently in foreign country B setting up a new permanent place of abode.

183-day Test

Under the 183-day Test, the taxpayer is a resident if they have been present in Australia for 183 days for more in an income year, unless the Commissioner is satisfied in both:

•                     the taxpayer's usual place of abode is overseas, and

•                     the taxpayer's does not have an intention to take up residency in Australia.

Application to your situation

You were present within Australia from XX July 20XX till XX August 20XX and XX September 20XX to XX September 20XX. In total during the year ended on 30 June 20XX, you were only present for the total number of XXX days within the tax year. Therefore, you are not a resident under this test for this tax year.

For the tax year that ended 30 June 20XX, you were not present within Australia for 183 days for more and therefore you are not a resident under this test for the 2024 income year.

Usual place of abode outside Australia.

In the context of the 183-day test, a person's usual place of abode is the place they usually live and can include a dwelling or a country. A person can only have one usual place abode under the 183-day test.

Relevant factors in considering whether your usual place of abode is outside Australia include:

•                     where you lived before and after your time in Australia.

•                     where your possession and assets are located.

•                     the type of visa, and length of your stay.

•                     your purpose of coming to Australia, and

•                     your travel arrangements.

To determine whether you intended to take up residence in Australia, we look at evidence of relevant objective facts. 'Intend to take up residency' does not merely mean intend to stay for a long time. This means indenting to live in Australia in such a manner that you would reside here.

Application to your situation

The Commissioner is satisfied that you did not intend to take up residence after you left for foreign country B on XX August 20XX, and that your usual place of abode is outside Australia because:

•                     you intended to stay in foreign country B for the foreseeable future.

•                     you sold your Australian property and Australian motor vehicles.

•                     you purchased your foreign country B property and foreign country B motor vehicles.

•                     you joined local memberships and your children are commencing school in foreign country B, and

•                     you had your Australian mail from the ATO, registered overseas voter address and other mail from banks that allow an overseas address sent to your current foreign country B residence.

These factors indicate you live in foreign country B in such a manner that you reside there and that it is your usual place abode is outside Australia from the XX August 20XX.

Commonwealth superannuation fund test

An individual is classified as a resident of Australia if they are either a member of a superannuation scheme established by deed under the Superannuation Act 1990 or eligible employee for the purpose 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 child under 16 of such a person.

Therefore, you are not a resident under this test.

Conclusion

For the period from XX August 20XX, you satisfy none of the statutory residency tests and cease to be a resident of Australia for income tax purposes.

Question 2

Did you make a choice to disregard making a capital gain or loss from all CGT assets when you ceased your Australian residency for the purposes of section 104-165 of the ITAA 1997?

Answer 2

Yes

Detailed reasoning

Section 104-160 of the ITAA 1997 provides:

(1)          CGT event I1 happens if you stop being an Australian resident.

(2)          The time of the event is when you stop being one.

You ceased being an Australian resident on XX August 20XX. Subsection 104-160(2) of the ITAA 1997 provides that CGT event I1 occurred at this time.

Section 104-165 of the ITAA 1997 provides:

(1)          If you are an individual, you can choose to disregard making a capital gain or a * capital loss from all CGT assets covered by CGT event I1.

(2)          If you do so choose, 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, if the CGT event involves you ceasing to own the asset;

(b)          you again becoming an Australian resident.

Subsection 104-165(2) of the ITAA 1997 specifies you can elect to disregard a capital gain or loss when you cease Australian residency. The election is made by the conduct of how your income tax return is completed. For the year ended 30 June 2023 you submitted that a capital gains tax event occurred and reported a $0 capital gain. You have indicated in your ruling application and your income tax return that you had made an election to disregard all capital gains and losses on becoming a non-resident.

Subsection 104-65(3) of the ITAA 1997 provides that in making the choice all CGT assets at this time are taken to be taxable Australian property until either subsection 104-165(3)(a) or 104-165(3)(b) applies to your circumstances.

In determining the character of the options in Company A for the purposes of the present ruling application it is necessary to further consider what section 104-165(3) means when it provides that 'each of those assets is taken to be taxable Australian property'.

Section 855-15 of the ITAA 1997 provides a table of 5 categories that are taxable Australian property. Item 5 of the table describes:

•                     A CGT asset that is covered by subsection 104 - 165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident)

Item 5 indicates that any CGT asset can be taken to be taxable Australian property for the purposes of subsection 104-165(3) of the ITAA 1997. The modifications in section 104-165 and section 855-15 of the ITAA 1997 do not operate to replace the character or nature of the CGT asset in question but rather indicate that for purposes of the ITAA 1997 it has the attribute of taxable Australian property.

This is further supported by the explanatory memorandum that supported the introduction of section 104-165(3) of the ITAA 1997. The explanatory memorandum to the Tax Laws Amendment (2006 Measures No. 4) Bill 2006 Tax Laws Amendment (2006 Measures No. 4) Act 2006 (EM) indicated what taxable Australian property is at paragraph 4.22:

A foreign resident is subject to Australian CGT if the relevant asset in relation to a CGT event is taxable Australian property. With one exception, an asset can only be taxable Australian property if it consists of an interest in either real property or the business assets of an Australian permanent establishment of a foreign resident. Applying Australian CGT to foreign residents only on these assets means Australia is more closely aligned with accepted international practice.

Taxable Australian property is a category in which multiple CGT assets can rest, namely an interest in real property or the business assets of an Australian permanent establishment of a foreign resident. These categories are not exhaustive in their ordinary meaning. Taxable Australian property could refer to a number of different types of assets. In further determining what taxable Australian property can mean for the purposes of section 104-165(3) of the ITAA 1997 paragraph 4.25 of the EM provides:

CGT assets covered by CGT event I1 include all assets that are not taxable Australian property and any indirect Australian real property interests (see paragraph 4.104). Where a taxpayer makes this election, subsection 104-165(3) deems those assets that were the subject of the election to be taxable Australian property. These assets are item 5 in the table in section 855-15

Section 104-165(3) of the ITAA 1997 will deem the relevant assets to be taxable Australian property for the purposes of the ITAA 1997 but it does not change the character of the assets. This much is expressly absent from the explanatory memorandum, and it is consistent with the ordinary meaning that taxable Australian property can cover multiple types of CGT assets. This reasoning is supported in the judgment by Davies, Moshinsky and Colvin JJ in Peter Greensill Family Co Pty Ltd (as trustee) v FC of T; Nicholas Martin & Anor v FC of T (2021) ATC 24449 at paragraph 69:

'Parliament wanted to preserve (and extend through interposed entities) Australia's right to impose CGT on taxable Australian property and never expressed an intention to raise capital gains from foreign residents in relation to non- taxable Australian property.' That intention was said to be reflected in the changes introduced by div 855, which focuses solely on the character of the CGT asset and no other criteria, such as the character of the taxpayer or the type of CGT asset.'

It is clear that the modifications to CGT assets impacted by an election made in section 104-165 of the ITAA 1997 are limited to changes to the character rather than changes to the type of CGT asset. For the purposes of the options in Company A, they will retain their type of asset being an option to purchase shares but will now instead have the character of taxable Australian property.

In completing your income tax return with a $0 capital gain in the year in which you ceased residency you made an election under section 104-165 of the ITAA 1997 to disregard any capital gain or loss. In making this election you have given all your CGT assets held at that time the character of taxable Australian property.

Question 3

Will the exercise of the options in Company A be disregarded for the purposes of section 134-1 of the ITAA 1997?

Answer 3

Yes

Detailed reasoning

Subsection 134-1(4) of the ITAA 1997 provides:

(4) A capital gain or capital loss the grantee makes from exercising the option is disregarded. However, this rule does not apply if the grantee acquired the option under a trust restructure (see Subdivision 124 - N) and, on exercising the option, held the resulting asset as an item of trading stock.

You have been granted the options in Company A and while these have the character of taxable Australian property from the date on which you ceased residency being XX August 20XX, they are still options for the purposes of the ITAA 1997.

You did not acquire the option under a trust structure and on exercising the option, the resulting asset was not an item of trading stock but instead shares in Company A. Therefore, any capital gain made in relation to the exercise of the options in Company A will be disregarded under subsection 134-1 of the ITAA 1997.

Question 4

Will a capital gain or loss made from the disposal of shares acquired from the options granted by Company A be disregarded when you are a non-resident for the purposes of section 855-10 of the ITAA 1997?

Answer 4

Yes

Detailed reasoning

Section 855-10 of the ITAA 1997 provides:

(1)          Disregard a capital gain or capital loss from a CGT event if:

(a)          you are a foreign resident, or the trustee of a foreign trust for CGT purposes, just before the CGT event happens; and

(b)          the CGT event happens in relation to a CGT asset that is not taxable Australian property.

When you exercise the options in Company A, this is the cessation of the options as a CGT asset and the acquisition of a new CGT asset being shares in Company A. The shares are not taxable Australian property for the purposes of section 855-15 of the ITAA 1997 as they do not meet the description for any of the items in the table in that provision.

You are a foreign resident just before you sell the shares and as such any capital gain that results from the sale is disregarded under section 855-10 of the ITAA 1997.