Private ruling: Residency for tax purposes and assessability of income
Published: February 2014
Ruling period: Year ended 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015 | Year ending 30 June 2016 | Year ending 30 June 2017 | Year ending 30 June 2018
Date scheme commenced: 1 July 2012

Ruling: Questions and answers | 1. Are you a resident of Australia for tax purposes from the time you departed Australia? | No. | 2. Is your foreign income assessable in Australia? | No. | 3. Is the lump sum payment in regards to your separation agreement assessable income? | No.

Relevant facts and circumstances: You were born in and are a citizen of Country X. You moved to Australia several years ago and became an Australian citizen. You separated from your Australian spouse in the relevant year and since then have been travelling around the world. You have earned foreign income while you have been overseas. You are currently still travelling but you ultimately plan to return to Country X. You entered into a legally binding court approved separation agreement with your former spouse. Under the terms of the separation agreement, your former spouse will pay you a lump sum amount by way of final settlement.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5. | Income Tax Assessment Act 1936 Section 6(1).

Reasons for decision: Detailed Reasoning - Residency for tax purposes: Generally where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source. The terms 'resident' and 'resident of Australia', in regard to an individual, are defined within the tax provisions and provides four tests to ascertain the residency status. Relevant to your situation are the first two tests which are examined in Taxation Ruling IT 2650 Income Tax: Residency - permanent place of abode outside Australia, a copy of which is available from www.ato.gov.au. Given regard to your circumstances as a whole and a consideration of the relevant residency tests, it is accepted that you are not a resident of Australia for tax purposes from the time you departed Australia. | Detailed Reasoning - Assessability of foreign income: Subsection 6-5(3) of the Income Tax Assessment Act 1997 (ITAA 1997) states: If you are a foreign resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. As explained above, you are not a resident of Australia for tax purposes, therefore only the income you derive from Australian sources is assessable in Australia. The income you earn outside of Australia is not assessable in Australia and does not need to be included in your income tax return. | Detailed Reasoning - Assessablity of payment under separation agreement: Ordinary income Subsection 6-5(2) of the ITAA 1997 provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources during the income year. Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that: · are earned · are expected · are relied upon, and · have an element of periodicity, recurrence or regularity. In your case, under the terms of the separation agreement, your former spouse will pay you a lump sum amount by way of final settlement. This payment does not have the characteristics of ordinary income as it has not been earned although it is expected and perhaps relied upon it does not have an element of periodicity, recurrence or regularity. Accordingly, the lump sum payment you will receive is not ordinary income and therefore not assessable under section 6-5 of the ITAA 1997. Statutory income - capital gains tax Section 102-20 ITAA 1997 provides that you can only make a capital gain or loss if a capital gains tax (CGT) event happens to a CGT asset. Subsection 108-5(1)(b) of the ITAA 1997 specifically includes a legal or equitable right that is not property within the definition of a CGT asset. Under section 104-25 of the ITAA 1997, CGT event C2 occurs if your ownership of an intangible CGT asset ends in certain ways, such as by the cancellation, surrender or similar endings. In your case, when you accepted the settlement terms of the separation agreement, which includes the agreement to accept a lump sum payment from your former spouse, you acquired a right to receive this payment. When you receive the lump sum payment from your former spouse, your ownership of this asset (right to receive a lump sum payment) will end by the asset being released or surrendered. Therefore, under subsection 104-25(1) of the ITAA 1997, CGT event C2 will occur. In certain circumstances, however, an exemption or exception can apply, which means that the gain or loss created by the CGT event is disregarded. Section 118-75 of the ITAA 1997 provides that a capital gain or loss which is made in relation to the cancellation of a right resulting from the breakdown of a marriage is disregarded if: (a) you make the gain or loss in relation to a right that directly relates to the breakdown of a marriage or de facto marriage; and (b) at the time of the CGT event: i. you and your spouse or former spouse are separated; and ii. there is no reasonable likelihood of cohabitation being resumed. In your case, as CGT event C2 occurred as a result of a marriage breakdown and you have met the conditions outlined under section 118-75 of the ITAA 1997, any capital gain or loss that you make is disregarded. Therefore, you do not need to include the lump sum payment in your income tax return.