Private ruling: Residency and main residence exemption
Date of advice: 27 June 2017
Published: October 2017
Date scheme commenced: 1 July 2016

Ruling: Q1: Are you a resident of Australia for taxation purposes under domestic law? | A1: Yes | Q2: Are you a resident of Australia for the purpose of the tie break test under the Double Tax Agreement (DTA) between Australia and the Country X? | A2: Yes | Q3: Are you entitled to a full main residence exemption when you sell the property? | A3: No | Q4: Are you entitled to a partial main residence exemption when you sell the property? | A4: Yes

Relevant facts and circumstances: You were born in Country X. You are a citizen of Country X. You have been travelling between Australia and Country X on a regular basis for many years for work, business and holidays. From 20XX you have shared your time between Australia and Country X. Your spouse is a citizen of Country X. Your spouse travels and accompanies you to Australia. You have so far spent more than 180 days in Australia in 2016-17FY. You enter Australia on a Special Category Visa. Neither you nor your spouse has applied for Australian permanent residency visa or Australian citizenship. You have casual employment in Australia with Company A and B. You have been working for Company A and B for many years. You do not have a job or employment position being held for you in Country X. You made several trips to Country X in 2016-17FY. You and your spouse jointly own a property in Australia. The property was purchased and rented it out for more than 6 years. You and your spouse have been living in the property while in Australia. You purchased all the furniture, a motor vehicle in Australia; you opened bank accounts in Australia; you have made several improvements to the property. You are planning to sell the property later this year. You own a property in Country X; you use it as your main residence; you leave it vacant while traveling to Australia. You have a Country X pension and bank term deposits. You do not intend to reside in Australia permanently; you intend to leave Australia in late 2017 or in 2018. You consider yourself a resident of Country X for taxation purposes. You and your spouse have never been Commonwealth government of Australia employees for superannuation purpose.

Relevant legislative provisions: Income Tax Assessment Act 1936 Subsection 6(1) | Income Tax Assessment Act 1997 Subsection 995-1(1) | International Tax Agreements Act 1953 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 108-5 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Subsection 118-110(1) | Income Tax Assessment Act 1997 Section 118-185

Reasons for decision: Summary: Section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident for taxation 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 test, ● the 183 day test, and ● the superannuation test. The primary test for deciding the residency status of each individual is whether they reside in Australia according to the ordinary meaning of the word resides. If the primary test is satisfied the remaining three tests do not need to be considered as residency for Australian taxation purposes has been established. | Detailed Reasoning - The resides (ordinary concepts) test: The outcomes of several Administrative Appeals Tribunal (AAT) cases have determined that the word 'resides' should be given the widest meaning and there have been a number of factors identified which can assist in determining if a particular taxpayer is a resident of Australia under this test. The Commissioner’s view on the resides test is contained in Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia . An individual may be considered a resident under the resides test if their behaviour while they are here is such that they exhibit a degree of continuity, routine or habit that is consistent with a person residing in Australia according to the ordinary meaning of the word 'reside’. Factors that can be taken into account when ascertaining the character of a person’s behaviour include the intention or purpose of the individual’s stay in Australia, presence of family in Australia, location of assets and social and living arrangements. As a broad principle, where a person has a settled routine for six months or more (for example, the person has stayed in one place or has been with one employer for six months at the same location) they may satisfy the resides test. In your case, you are a citizen of Country X; you have been travelling between Australia and Country X on a regular basis for many years for work, business and holidays; you enter Australia on a Special Category Visa; you spouse travels and accompanies you to Australia; you live in your own house. Based on the above, it is considered that you have established a settled routine in Australia. Although you intend to leave Australia, your current circumstances and day to day activities are consistent with residing in Australia according to ordinary concepts. Therefore, you satisfy the resides test of residency and none of the other tests need be applied. | Detailed Reasoning - Question 2: You are a resident of both Australia and Country X for taxation purposes, it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act). Schedule to the Agreements Act contains the double tax agreement between Australia and Country X (the Convention). The Convention operates to avoid the double taxation of income received by Australian and Country X residents. Article 4(2) of the Convention provides tests of residency which are used where the individual is a resident of two countries (tie breaker tests). The tiebreaker tests ensure that the individual is only treated as a resident of one country for the purposes of working out liability to tax on their income. The tiebreaker rules do not change a taxpayer's residency status for domestic law purposes. Article 4(2) of the Convention provides that a person's residency status for the purpose of applying the Convention shall be determined as follows: a) the individual shall be deemed to be a resident only of the State in which a permanent home is available to that individual; but if a permanent home is available in both States, or in neither of them, that individual shall be deemed to be a resident only of the State with which the individual's personal and economic relations are closer (centre of vital interests); b) if the State in which the centre of vital interests is situated cannot be determined, the individual shall be deemed to be a resident only of the State in which that individual has an habitual abode; c) if the individual has an habitual abode in both States or in neither of them, the individual shall be deemed to be a resident only of the State of which that individual is a national. | Detailed Reasoning - Permanent home: In Taxation Ruling TR 2001/13 Income tax: Interpreting Australia’s Double Tax Agreements , the Commissioner accepts that it is appropriate to have reference to the OECD Model Tax Convention and Commentary (OECD Commentary) which provides guidance on the interpretation of the terms used in double tax agreements. The OECD Commentary provides that in relation to a 'permanent home': ● for a home to be permanent, an individual must have arranged and retained it for his or her permanent use as opposed to staying at a particular place under such conditions that it is evident that the stay is intended to be of short duration. The dwelling has to be available at all times continuously and not occasionally for the purposes of a stay, which owing to the reasons for it is necessarily of short duration (e.g. travel for pleasure, business travel, attending a course etc.). ● any form of home may be taken into account, including a house or apartment belonging to or rented by the individual and a rented furnished room. In your case, you maintain a permanent home in Country X; you purchased an Australian property; the property was rented it out for more than 6 years; you and your spouse have been living in the property while in Australia; you leave it vacant while in Country X. It is considered that your home in Australia is also a permanent home. As you have a permanent home in both countries which are available at all times continuously for your use, we now will consider your economic and personal ties. | Detailed Reasoning - Economic and personal ties: In relation to a taxpayer's personal and economic relations, the OECD Commentary states that regard should be had to factors such as family and social relations, occupation, political, cultural or other activities and place of business. In your case, you have been travelling between Australia and Country X on a regular basis for many years for work, business and holidays; you have a spouse and you do not have dependent children; your spouse travels and accompanies you to Australia most of the time; you have causal employment with two Australian companies and you receive salary and wages from these Australian companies; you do not have a job or employment position being held for you in Country X. Based on the information provided, your economic and personal ties are closer to Australia. Accordingly, you are a resident of Australia for the purpose of the tie break test under the Double Tax Agreement (DTA) between Australia and Country X. | Detailed Reasoning - Capital gains tax: Section 102-20 of the ITAA 1997 provides that you make a capital gain or loss as a result of a CGT event happening to a CGT asset in which you have an ownership interest. Buildings and land are CGT assets as defined under section 108-5 of the ITAA 1997 and the disposal of a CGT asset triggers a CGT event under section 104-10 of the ITAA 1997. The most common event is CGT event A1 which occurs when you dispose of a CGT asset to someone. Subsection 104-10(5) of the ITAA 1997 provides that any capital gain or loss is disregarded if you acquire the asset before 20 September 1985. | Detailed Reasoning - Main residence exemption: Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or loss made from a CGT event that happens to a dwelling which is your main residence. To qualify for main exemption, the dwelling must have been your main residence for the whole period you owned it, must have not been used to produce assessable income. | Detailed Reasoning - Moving into the dwelling as soon as practicable: Section 118-135 of the ITAA 1997 extends the main residence exemption to take into account the time needed to move into a dwelling. The section allows you to treat a dwelling as your main residence for the period from when you acquired it until it was first practicable to move into it. The term 'as soon as practicable' in section 118-135 of the ITAA 1997 is used to provide some leeway from what would otherwise be a strict requirement that the full exemption would only be available if the dwelling became your main residence on the date you acquired it; that is, you would have to physically move in on the day of settlement. In your case, you purchased the Australian property and you did not move into the dwelling as soon as practicable, you rented it out for more than 6 years. Therefore, you will not be entitled to a full main residence exemption on the dwelling. However, as you did establish the dwelling as your main residence when you physically moved into the dwelling, you will be entitled to a partial main residence exemption. | Detailed Reasoning - Partial Main residence exemption: Section 118-185 of the ITAA 1997 states that if a dwelling is your main residence for only part of your ownership period, you will only get a partial exemption for any loss or gain arising from a CGT event that occurs in relation to that dwelling. The capital loss or gain is calculated using the following formula: CG or CL amount × Non-main residence days Days in your *ownership period (Non-main residence days are the number of days where a dwelling was not occupied as your main residence).