ATO ID 2006/262: Assessability of a capital gain derived by a non-resident from the disposal of shares in an Australian public company which do not have the necessary connection with Australia
Date of decision: 21 September 2006
Year of income: Year ended 30 June 2006
Business line: Public Groups and International

Issue
Does Australia have a taxing right under Article 13(6) of Schedule 2 and Schedule 2A (the US Convention) to the International Tax Agreements Act 1953 (Agreements Act) in respect of a capital gain which arises from the disposal of shares in an Australian public company which were acquired while the taxpayer was a resident of Australia but disposed of while the taxpayer was a United States (US) resident, where the taxpayer made a choice under subsection 104-165(2) of the Income Tax Assessment Act 1997 (ITAA 1997) to disregard making a capital gain on the shares upon cessation of Australian residency for tax purposes?

Decision
No. Australia does not have a taxing right under Article 13(6) of the US Convention in respect of a capital gain which arises from the disposal of shares in an Australian public company which were acquired while the taxpayer was a resident of Australia but disposed of while the taxpayer was a US resident, where the taxpayer made a choice under section 104-165(2) of the ITAA 1997 to disregard making a capital gain on the shares upon cessation of Australian residency for tax purposes.

Facts
The taxpayer is a non-resident of Australia for tax purposes and is a US resident for tax purposes. The taxpayer owns shares in an Australian public company. The shares were purchased while the taxpayer was a resident of Australia for taxation purposes. The taxpayer made a choice under section 104-165(2) of the ITAA 1997 to disregard making a capital gain or a capital loss upon cessation of Australian residency for tax purposes. The taxpayer disposed of the shares when they were a resident of the US for tax purposes. The shares owned by the taxpayer did not represent 10% or more of the value of the Australian public company at any time during the five years prior to disposal ("portfolio shares").

Reasons for decision
Summary: The assessable income of a non-resident includes statutory income from all Australian sources as well as other statutory income that a provision includes in assessable income on some basis other than having an Australian source (subsection 6-10(5) of the ITAA 1997). Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in this list is section 102-5 of the ITAA 1997 which provides that a net capital gain is to be included in assessable income. When the taxpayer became a non-resident of Australia, a choice was made under subsection 104-165(2) of the ITAA 1997 to disregard a capital gain made in respect of portfolio shares that were otherwise covered by CGT event I1. As a result of that choice, those assets are treated under subsection 104-165(3) of the ITAA 1997 as assets which have the necessary connection with Australia until the earlier of a CGT event happening in relation to the asset or the taxpayer becoming an Australian resident. In determining liability to Australian tax on income received by a non resident, it is necessary to consider not only the income tax laws but any applicable tax treaty contained in the Agreements Act. Section 4 of the Agreements Act incorporates that Act with the ITAA 1997 so that those Acts are read as one. The Agreements Act effectively overrides the ITAA 1997 where there are inconsistent provisions (except for some limited provisions). Schedules 2 and 2A respectively of the Agreements Act contain the tax treaty between Australia and the US and the protocol amending the US Convention. Article 13 of the US Convention deals with the alienation of property. Article 13(6) of the US Convention provides that an individual who had made an election to defer taxation on income or gains relating to property which would be otherwise taxable in Australia upon the individual ceasing to be a resident of Australia for the purposes of its tax, shall, if the individual is a resident of the US, be taxable on income or gains from the subsequent alienation of that property only in the US. As the taxpayer made a choice under subsection 104-165(2) of the ITAA 1997 to defer the taxation on the gain relating to the portfolio shares upon cessation of residency for Australian tax purposes, any subsequent disposal of such shares can only be taxable in the US by virtue of Article 13(6) of the US Convention. Moreover, the effect of Article 13(6) of the US Convention will override subsection 104-165(3) of the ITAA 1997 by virtue of subsection 4(2) of the Agreements Act.

Legislative references: Income Tax Assessment Act 1997 section 6-10 subsection 6-10(5) section 10-5 section 102-5 subsection 104-165(2) subsection 104-165(3)
Subject references: CGT events I1-I2 - Australian residency ends Double tax agreements Net capital gains United States