Question

James Cookie is a ship’s officer employed by Sails International Inc, a company incorporated in Bermuda that owns cruise boats and operates passenger cruises in the Pacific Ocean.

James owns a house in Sydney which was formerly his family home but his estranged wife and children now live in Singapore. James rents the house to his cousin and family. The house is let fully furnished; the furniture belongs to James. Whenever he is in Sydney, James stays in the house and has his own room in which are stored his personal belongings. In the current income year James spent 80 days in the house. The remainder of the time was spent on a cruise ship except for 20 days spent visiting his children in Singapore.

The ship on which James serves visits a variety of ports, mainly in the South Pacific. James’s employment contract was negotiated and signed in Hong Kong.

Required 1:      For Taxation purposes, is James a resident of Australia? What is the source of his salary from Sails International?

Required 2:      If James sold his house, would he be entitled to the main residence exemption in Subdiv 118-B?

Answer 1

Answer 01 : In order to determine the residency for taxation purposes in Australia, if a person resides in Australia then that person is a tax resident of Australia.

But if you don't satisfy the resides test, you'll still be considered an Australian resident if you satisfy one of three statutory tests:

1. The domicile test: You're an Australian resident if your domicile (broadly, the place that is your permanent home) is in Australia, unless we are satisfied that your permanent place of abode is outside Australia.

OR
2. The 183-day test: If you're actually present in Australia for more than half the income year, whether continuously or with breaks, you may be said to have a constructive residence in Australia, unless it can be established that your usual place of abode is outside Australia and you have no intention of taking up residence here.

OR
3. The superannuation test: This test applies to Australian government employees working at Australian posts overseas and who are members of the CSS or PSS schemes. It does not apply to members of the PSSAP scheme.

Since the domicile test is positive for James as he has a permanent home in Sydney, he is a tax resident of Australia.

The source of his salary from sails international will be Income from Foreign Sources for foreign employment.

Answer 02 : Since James is using his residence for rent out purposes to his cousin, he is not eligible for exemption from Capital Gains Tax under subdiv 118-B if he solds his main home in Sydney. Law states that if you use your main home for income producing purposes then you can not avail the benefit of subdiv 118-B in case you sold that main home i.e no CGT exemption.