Private ruling: Residency and capital gains tax
Published: April 2015
Ruling period: 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 20ZZ

Ruling: Q1: Are you going to be considered a non-resident for tax purposes after leaving Australia? | A1: Yes | Q2: Are you able to rent out your house in Australia and sell it in less than 6 years without paying capital gains tax? | A2: Yes

Relevant facts and circumstances: You are an Australian and Country A citizen, and your country of origin is Country A. You were granted permanent residency in Australia in 20XX. You purchased land in Australia in 20YY where you constructed a dwelling that you moved in to 20ZZ. You, your spouse and son have lived at the address since that date and will move out in 20AA. You keep your personal belongings at your Australian dwelling and have your mail delivered to this address, including correspondence from the Australian Taxation Office. You are moving to Country B for work during 20AA. You intend to rent your Australian dwelling out once you move out in 20AA. You are going to live in Country B for at least two years but possibly longer. You are travelling with a tourist visa but the company that is employing you will apply for a residency permit on your arrival. It is expected that you should receive this permit shortly after you arrive. The residency permit needs to be renewed by your employer every x years. Your spouse and child will relocate to Country B with you, and also stay for at least two years. You intend on returning to Australia but are unsure when that will be. You believe you could stay in Country B between 2-5 years. You do not hold a return airline ticket. The company employing you will provide your family with accommodation for a short period in Country B. After that you are going to rent a place in Country B. You will have your household effects from Australia shipped to Country B. You own cars in Australia that you intend to sell before you leave, and have bank accounts. You do not intend to notify your financial institutions that you are a foreign resident as you do not receive interest on the money in your accounts, or have other investments. You run a small business in Australia that will continue to operate while you are in Country B. You are unsure how much income you will receive while you are away. You intend on returning to Australia no more than once per year. You have a share in a house, some savings and a bank account in Country A. You will notify Medicare to have your name removed from their records prior to leaving Australia. Neither you nor your spouse are government employees.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1997 subsection 6-5(3) | Income Tax Assessment Act 1997 Subsection 6-5(3)(b) | Income Tax Assessment Act 1997 Section 118-110 | Income Tax Assessment Act 1997 section 118-145 | Income Tax Assessment Act 1997 section 118-185 | Income Tax Assessment Act 1997 section 118-190 | Income Tax Assessment Act 1997 section 995-1

Reasons for decision: Detailed Reasoning - Residency for taxation purposes - general: 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. These 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. If residency is established under the resides test, the remaining three tests do not need to be considered. 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'. The Macquarie Dictionary defines 'reside' 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'. Taxation Ruling IT 2650 Income Tax: residency - permanent place of abode outside Australia specifies that a person's place of abode is where they live. In your case you will be living and working in Country B for a period of between 2 to 5 years. Therefore, you will not meet the resides test. | Detailed Reasoning - The domicile and permanent place of abode test: Under this test, a person whose domicile is in Australia will be considered a resident of Australia for taxation purposes; unless the Commissioner is satisfied the person's permanent place of abode is outside Australia. A person's domicile is generally their country of birth. This is known as a person's domicile of origin. A person's domicile of origin will not usually change but can in some circumstances. For example, a person can acquire a domicile in another country by choice. In order to acquire a domicile by choice outside of their domicile of origin, a person must have an intention to make their home indefinitely in a country outside their domicile of origin. Sufficient proof of such an intention is considered to exist in cases where a person becomes a citizen of a country outside of their domicile of origin. A permanent place of abode does not have to be 'everlasting' or 'forever'. It does not mean an abode in which you intend to live for the rest your life. An intention to return to Australia in the foreseeable future to live does not prevent you in the meantime setting up a permanent place of abode elsewhere. Some of the factors which have been considered relevant by the Courts, Boards of Review and Administrative Appeals Tribunal and which are used by the ATO in reaching a state of satisfaction as to a taxpayer's permanent place of abode include: • 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; and • the durability of association that the person has with a particular place in Australia, i.e. maintaining bank accounts 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. In your case your domicile of origin is in Country A and your current domicile is in Australia. You have not made a decision to make your domicile outside of Australia in Country B. However, you are making a decision to make your permanent place of abode outside Australia. This is evidenced by the period you intend to stay in Country B, which is a significant period of at least 2 years but possibly up to 5 years. You only intend to visit Australia on irregular occasions no more than once per year. Furthermore, your place of abode in Australia will be rented out whilst you are overseas and your other Australian assets will be sold or moved overseas, with the exception of your Australian bank accounts. This suggests that you will not have a place of abode in Australia while you are overseas. You will also not have any dependants in Australia as your spouse and child are accompanying you in Country B for the full length of your stay. This suggests that there won't be any durability of association with Australia whilst you are in Country B. Therefore you will not be considered an Australian resident under the domicile test. | Detailed Reasoning - The 183-day test: Where a person is present in Australia for 183 days during an income year, the person will be a resident of Australia for taxation purposes unless the Commissioner is satisfied that the person's usual place of abode is outside Australia and the person does not intend to take up residence in Australia. You will not be a resident of Australia for taxation purposes under this test after you leave Australia as you don't intend to be in Australia for a period of longer than 183 days. For the year you are leaving Australia you will be a resident up until you leave Australia as your usual place of abode will then be outside Australia. | Detailed Reasoning - The superannuation test: Under this test, an individual will be considered a resident of Australia for taxation purposes if: 1. they are a member of the Public Sector Superannuation Scheme (PSS) which was established under the Superannuation Act 1990 , 2. they are an eligible employee in respect of the Commonwealth Superannuation Scheme (CSS) which was established under the Superannuation Act 1976 , or 3. they are the spouse or a child under 16 of a person who is a member of the PSS or an eligible employee in respect of the CSS. In your case, you are over the age of 16, and you are not a member of the PSS or an eligible employee for the purposes of the CSS. You do not have a spouse who is a member of the PSS or an eligible employee for the purposes of the CSS. Therefore, when you leave Australia for Country B at the end of April 20AA you will be a non-resident for tax purposes. | Detailed Reasoning - Taxation requirements of a non-resident: Subsection 6-5(3) of the ITAA 1997 states: If you are a foreign resident, your assessable income includes: (a) the ordinary income you derive 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. In your case, the rental income you earn from your Australian property and the income earned by your Australian business will be assessable income in Australia. You will be required to pay non-resident tax on this income, and any other income covered under subsection 6-5(3) of the ITAA 1997. The ordinary income you earn whilst working in Country B will not be assessable, and therefore not taxable in Australia unless it is covered by a provision in subsection 6-5(3)(b) of the ITAA 1997. | Detailed Reasoning - Main residence and capital gains: Generally, you can disregard a capital gain or capital loss from a CGT event that happens to a dwelling that is your main residence (section 118-110 of the ITAA 1997). However, in order to obtain a full exemption from CGT, the dwelling must have been your main residence for the entire period you owned it (section 118-110 and 118-185 of the ITAA 1997), must not have been used to produce assessable income (section 118-190 of the ITAA 1997) and any land on which the dwelling is situated should not be more than two hectares. If you own more than one dwelling during a particular period, only one of them can be your main residence at any one time. In some cases, you can choose to treat a dwelling as your main residence even though you no longer live in it. The absence provision under section 118-145 of the ITAA 1997 allows a dwelling that has qualified as your main residence to continue to be treated as your main residence during a period of absence from the dwelling if you do not have another main residence. Where the concession is chosen, a dwelling can be treated as your main residence for a maximum period of 6 years of absence when the dwelling is being used to produce assessable income. The period starts from the date you move out of the dwelling and will include any period during which the property is left vacant while it is advertised for tenants. You are entitled to another maximum period of 6 years each time the dwelling again becomes and ceases to be your main residence. Furthermore, for this exemption to apply it must be established that a property is or has been your main residence. Whether a dwelling is an individual's principle residence depends on the facts of each case. The factors to be taken into account include: • The length of time you live there - there is no minimum time a person has to live in a home before it is considered to be their main residence • Whether your family lives there • Whether you have moved your personal belongings into the home • The address to which your mail is delivered • Your address on the electoral roll • The connection of services (for example, phone, gas, electricity, internet, pay TV etc) • Your intention in occupying the dwelling. A mere intention to construct or occupy a dwelling as your main residence - without actually doing so - is not sufficient to obtain the exemption. In your case, you purchased land in 20YY where you constructed a dwelling that you moved in to in 20ZZ. You have occupied the dwelling with your spouse and Child since that time. You have kept your personal belongings at the dwelling and you have had your mail delivered to that address, including your correspondences sent by the ATO. We consider that you have treated this dwelling as your main residence. You have indicated that you will move out of your dwelling in 20AA, and that you intend to rent it out following once you have left. Therefore, you will be able to apply the absence provision for a period of up to 6 years from the date you leave the dwelling provided you do not treat another property as your main residence during this period. | Detailed Reasoning - Ruling restricted to four years: As tax legislation is subject to change, it is considered unreasonable to rule for more than four years in advance. For this reason this ruling has been restricted to the period covered by the four financial years up to the year ended 30 June 2018. However, this does not mean that you are required to apply for a new ruling every four years. In the absence of any change to the legislation, the interpretation of the law as explained in this ruling will continue to apply.