Private ruling: Residency and capital gains tax (CGT) main residence exemption
Date of advice: 11 December 2018
Published: April 2019
Ruling period: Year ended 30 June 2018 | Year ending 30 June 2019
Date scheme commenced: 1 July 2017

Ruling: Q1: Did you cease to be an Australian resident in May 2018? | A1: Yes | Q2: Will you be eligible to claim the full capital gains tax main residence exemption if you sell your property before 30 June 2019? | A2: Yes

Relevant facts and circumstances: You were born in and are a citizen of country A. You are not an Australia citizen. You were granted an independent overseas student visa in Australia in May 2004. You were granted a return resident visa in Australia in August 20UU, this was renewed in July 20XX and is valid until July 20AA. You purchased a property in a City A in August 20VV. You lived in the property from August 20VV and treated the property as your main residence. You moved to City B for work in April 20YY. You lived in rented accommodation in City B from April 20YY to December 20YY. You did not purchase another property. You lived in rented accommodation in City A from March to May 20ZZ before departing for country B. You have been issued with a permanent resident visa and card in country B, which allows you to stay permanently in country B. You moved to country B to look for work and to settle down. You are undecided as to how long you will stay in country B. You formed the intention to move permanently to country B in 20WW. You moved to country B in May 20ZZ. You do not have a return ticket to Australia. You returned to Australia in March 20ZZ and departed in May 20ZZ. You have rental accommodation in country B. You have bank accounts and superannuation in country B. Your City A property has been rented out since September 20ZZ. You sold your car and disposed of a significant amount of your belongings before moving to country B. You are receiving rental income from your property in City A. You have permanent employment in country B. You have no job held for you in Australia. You have no social connections in Australia. You have not advised your Australian bank that you are residing in country B. You have cancelled your private health insurance in 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 subdivision 118-B | Income Tax Assessment Act 1997 section 118-110 | Income Tax Assessment Act 1997 subsection 118-145(1) | Income Tax Assessment Act 1997 subsection 118-145(2)

Reasons for decision: Summary: Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income derived 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. This includes employment income, rental income, Australian pensions and annuities and capital gains on Australian assets. The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the Income Tax Assessment Act 1936 (ITAA 1936). The definition offers four tests to ascertain whether each individual taxpayer is a resident of Australia for income tax purposes. These tests are the: ● resides test ● domicile and permanent place of abode test ● 183 day test and ● Commonwealth superannuation fund 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 tax purposes has been established. | Detailed Reasoning - The resides (ordinary concepts) test: The ordinary meaning of the word 'reside', according to the Macquarie Dictionary , 2001, rev. 3rd edition, The Macquarie Library Pty Ltd, NSW, is 'to dwell permanently or for a considerable time; having one's abode for a time', and according to the Compact Edition of the Oxford English Dictionary (1987), 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'. The Courts and the Tribunal have generally taken into account the following eight factors in considering whether an individual is an Australian resident according to ordinary concepts in an income year: ● physical presence in Australia; ● nationality; ● history of residence and movements; ● habits and 'mode of life' ● frequency, regularity and duration of visits to Australia; ● purpose of visits to or absences from Australia; ● family and business ties with Australia compare to the foreign country concerned; and ● maintenance of a place of abode. The weight to be given to each factor will vary with the individual circumstances and no single factor is necessarily decisive. Taxation Ruling IT 2650 Income Tax: Residency – permanent place of abode outside Australia , emphasises the intended and actual length of the individual's stay in an overseas country, any intention to return to Australia or travel elsewhere, the establishment or abandonment of any residence, and the durability of association that the individual maintains with a particular place in Australia as the main factors to be considered when determining the residency status of individuals leaving Australia. Physical presence in Australia ● You have moved and taken up permanent residency in country B. Taxation Ruling TR 98/17 Income tax: residency status of individuals entering Australia , considers physical presence or length of time by itself is not determinative of residency. An individual's behaviour as reflected by a degree of continuity, routine or habit that is consistent with residing in Australia is relevant. Family and business ties with Australia ● You are single with no ties to Australia. ● You receive income form you rental property in Australia. Maintenance of a place of abode ● The property you own in Australia is currently rented out. ● You sold your car and most of your personal belongings prior to moving to country B. You have shown that you are no longer residing in Australia according to ordinary concepts when you departed Australia to live in country B and are therefore not considered to be a resident of Australia under the resides test. | Detailed Reasoning - The domicile test: "Domicile" is a legal concept to be determined according to the Domicile Act 1982 and to the common law rules which the courts have developed in the field of private international law. The primary common law rule is that a person acquires at birth a domicile of origin, being the country of his or her father's permanent home. A person retains the domicile of origin unless and until he or she acquires a domicile of choice in another country, or until he or she acquires another domicile by operation of law. You are not a resident of Australia under the domicile test as your domicile of origin is country A and there is no evidence that you have acquired a domicile of choice in Australia. | Detailed Reasoning - The 183-day test: Where a person is present in Australia for 183 days during the year of income the person will be a resident, 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. As your permanent place of abode is outside Australia you are not a resident of Australia under the 183-day test. | Detailed Reasoning - The superannuation test: Under section 6(1) of the ITAA 1936, an individual is still considered to be a resident if that person is: a) a member of the superannuation scheme established by deed under the Superannuation Act 1990 ; or b) an eligible employee for the purposes of the Superannuation Act 1976; or c) the spouse, or a child under 16, of a person covered by (a) or (b). You are not eligible to contribute to the relevant Commonwealth superannuation funds therefore you are not a resident of Australia under the superannuation test. | Detailed Reasoning - Your residency status: As you do not meet any of the residency tests you would not be considered an Australian resident for income tax purposes for the year ending 30 June 2019. | Summary: You will be entitled to the full Capital Gains Tax (CGT) exemption on the sale of your main residence property under Subdivision 118-B of the Income Tax Assessment Act 1997 (ITAA 1997) if the property is sold prior to 30 June 2019. Whether you will continue to be entitled to the main residence exemption after 1 July 2019 depends on changes in the law being passed by parliament. | Detailed Reasoning - Detailed reasoning: In certain circumstances, there may be an exemption that can apply, which means that the gain or loss created by a CGT event is disregarded. Exemptions from CGT are set out in Division 118 of the ITAA 1997. In particular, subdivision 118-B of the ITAA 1997 contains the CGT main residence exemption. The exemption disregards a capital gain or capital loss a taxpayer makes from a CGT event that happens to a dwelling, or their ownership interest in a dwelling, which is their main residence. Section 118-110 of the ITAA 1997 provides that a capital gain or capital loss you make from a CGT event that happens to your residence CGT asset that is a dwelling is disregarded if: (a) you are an individual; and (b) the dwelling was your main residence throughout your ownership period; and (c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person. Subsection 118-145(1) of the ITAA 1997 provides that if a dwelling that was your main residence ceases to be your main residence, you may choose to continue to treat it as your main residence. Further subsection 118-145(2) states if you use the part of your dwelling that was your main residence for the purpose of producing assessable income, the maximum period that you can treat it as your main residence under this section while you use it for that purpose is six years. You are entitled to continue to treat your City A property as your main residence for up to six years provided you do not treat any other property as your main residence. As you moved out of the property in April 20xx you can continue to treat the City A property as your main residence until April 20YY. However this is subject to any changes in the law. In the 2017-18 Budget, the government announced that foreign residents will no longer be entitled to claim the main residence exemption when they sell property in Australia. This change is not yet law and is subject to parliamentary process. If the law is passed and you are a foreign resident when a CGT event happens to your residential property in Australia, you may no longer be entitled to claim the main residence exemption. This will apply to you: ● when you use the exemption as a reason for a variation to your foreign resident capital gains withholding rate ● when you lodge your income tax return. You must declare any net capital gain in your income and you can claim a credit for foreign resident withholding tax paid to us. For property held prior to 7:30pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from 1 July 2019 they will no longer be entitled to the exemption. Therefore you will be entitled to the full main residence CGT exemption on the sale of your City A property under Subdivision 118-B of the ITAA 1997 if the property is sold prior to 30 June 2019. Your entitlement after this date is dependent on the proposed changes in law being passed by parliament.