Private ruling: Residency
Published: June 2015
Ruling period: Year ending 30 June 2012 | Year ending 30 June 2013 | Year ending 30 June 2014 | Year ending 30 June 2015
Date scheme commenced: 1 July 20XX

Ruling: Questions and answers: | 1. Are you a resident of Australia for tax purposes from the 2010-11 financial year? | Yes. | 2. Is your foreign sourced income exempt from tax in Australia while you were on a temporary visa? | Yes. | 3. Is your foreign sourced income assessable in Australia from when you transferred to a permanent Visa? | Yes. | 4. Are you required to submit a tax return for the 2010-11 financial year? | No. | 5. Are you required to pay capital gains tax in Australia if you dispose of units in a Unit Trust after you transferred to a permanent visa? | Yes.

Relevant facts and circumstances: You are a Country A citizen. You entered Australia on a temporary visa in 20YY, which entitled you to stay in Australia to work. You commenced work in Australia in the 20ZZ financial year. You did not earn any other income in Australia during the 20YY financial year. You did not lodge a tax return for the 20YY financial year. At the time of entering Australia you did not intend to immigrate here permanently, but to stay a maximum of 4 years. You have spent more than 183 days in Australia in each financial year since 1 July 20YY. You have treated Australia as your place of abode since you moved here in 20YY. You were granted a permanent visa for the first time in 20VV. Since moving to Australia you have maintained some finances in the Country A. These include a Unit Trust, interest on savings and pension payments. You have not included these payments on your income tax returns for the relevant financial years. You do not have a spouse who is a permanent resident or Australian citizen.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1997 section 768-910 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Detailed Reasoning - Residency for taxation purposes: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are an Australian resident for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a non-resident of Australia for taxation purposes, your assessable income includes only income from an Australian source. 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', in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. The tests are: • the resides test, • the domicile (and permanent place of abode) test, • the 183 day test, and • the superannuation test. If any one of these tests is met, an individual will be a resident of Australia for taxation purposes. The resides test is the primary test for determining the residency status of an individual for taxation purposes. If residency is established under the resides test, the remaining three tests do not need to be considered. However, if residency is not established under the resides test, an individual will still be a resident of Australia for taxation purposes if they meet the conditions of one of the other three tests. | Detailed Reasoning - The resides test: The resides test considers whether an individual is residing in Australia according to the ordinary meaning of the word 'reside'. As the word 'reside' is not defined in Australian taxation law, it takes it's ordinary meaning for the purposes of subsection 6(1) of the ITAA 1936. In Dempsey and Commissioner of Taxation [2014] AATA 335 (29 May 2014) the Administrative Appeals Tribunal noted that the settled position of the courts (at ultimate appellant level) as to the meaning of the word resides in the ITAA 1936 is that the word: bears its ordinary English meaning, which 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". Based on the facts of your case, the Commissioner considers that you were residing in Australia according to the ordinary meaning of the word from the date you arrived in Australia in 20YY. | Detailed Reasoning - Temporary residency: You are a temporary resident if you: • hold a temporary visa granted under the Migration Act 1958 • are not an Australian resident within the meaning of the Social Security Act 1991, and • do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. The Social Security Act 1991 defines an Australian resident as a person who resides in Australia and is an Australian citizen, the holder of a permanent visa, or a protected special category visa holder. In your case, you were not an Australian resident within the meaning of the Social Security Act 1991 from when you first arrived in Australia in 20YY to when you obtained a permanent visa in 20VV as you were not an Australian citizen, did not hold a permanent visa, or a protected special category visa. In your case you were a temporary resident because: • you held a temporary visa granted under the Migration Act 1958 , • you were not an Australian resident within the meaning of the Social Security Act 1991, and • you did not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991. | Detailed Reasoning - Foreign source income: From 1 July 2006, those taxpayers considered to be temporary residents do not have to pay tax in Australia on most of their foreign income if they: • are an individual who is an Australian resident for tax purposes, and • Satisfy the requirements of being a temporary resident. Section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that ordinary income derived from a foreign source (excluding employment related income and capital gains on shares and rights acquired under employee share schemes) and is exempt from income tax in Australia when derived by a temporary resident in Australia. Therefore, as you were a temporary resident of Australia for taxation purposes, any foreign sourced income you derived will be exempt from income tax in Australia under section 768-910 of the ITAA 1997. | Detailed Reasoning - 189 permanent resident visa: In 20VV you obtained an Australian permanent resident visa. As you meet the requirements of 'the resides' test and you are no longer a temporary resident, all your income from sources inside and out of Australia will be assessable in Australia. | Detailed Reasoning - 20YY income tax return: In 20YY financial year you did not earn any income in Australia. Therefore, as you were a temporary resident, you are not required to lodge an income tax return. | Detailed Reasoning - Capital gains tax liabilities: Australian residents are required to pay tax on their capital gains from Australian and foreign investments. As you are considered an Australian resident for tax purposes from the date you acquired a permanent visa you will be required to pay tax on capital gains you receive from this date. Therefore, if you sell or sold units in a unit trust, on or after the date you obtained a permanent visa, you will be required to pay tax on any capital gains you receive as a result. You can find the Guide to Capital Gains Tax on ATO.gov.au (search for QC39804) to assist you with the calculation of the capital gain or loss on disposal of your investments. Specific information in relation capital gains to becoming a resident can be found on ATO.gov.au by searching for QC17934. | Detailed Reasoning - Example of how to calculate capital gains tax on a Unit Trust: Terry is a UK citizen. On 8 March 2013 Terry set up a unit trust in the UK where he acquired 1000 units at £10.00 each (The exchange rate on 8 March 2013 was A$1 = £0.7072 which converts the amount of £10,000 to A$14,140). On 7 July 2014 Terry received a dividend of £1.00 per unit for a total of £1000. Terry was required to pay 10% dividend tax on this amount in the UK. Terry immediately reinvested the remaining £900 into the unit trust to buy an additional 72 units at £12.50 each. (The exchange rate on 7 July 2014 was A$1 = £0.5660 which converts the amount of £900 to A$1,590). In August 2014 Terry became an Australian resident for tax purposes. On 9 March 2015 Terry sold all of his units in the unit trust at £15.00 per unit for a total of £16,080 (The exchange rate on 9 March 2015 was A$1 = £0.5329 which converts the amount of £16,080 to A$30,174). As Terry is an Australian resident for tax purposes he is required to pay tax on capital gains on foreign investments. | Detailed Reasoning - Calculation of capital gain for units acquired in March 2009: Cost base of 1000 units - $14,140 Amount received on sale of 1000 units - $28,147 Capital gain - $14,007 As the units have been held for longer than 12 months the capital gain can be reduced by 50% to $7,003. | Detailed Reasoning - Calculation of capital gain for units acquired in July 2010: Cost base of 72 units = $1590 Amount received on sale of 72 units = $2026 Capital gain - $436 As the units have not been held for longer than 12 months the capital gain cannot be reduced.