Private ruling: Trading stock
Date of advice: 17 February 2017
Published: July 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: Does Capital Gains Tax (CGT) event I1 happen when you cease to be an Australian resident under section 104-160 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes, however any gain or loss made in respect of your trading stock is disregarded. | Q2: Is the sale of trading stock after you become a non-resident assessable under subsection 6-5(3) of the ITAA 1997? | A2: No, as it is not Australian sourced income. | Q3: Is the sale of trading stock after you become a non-resident assessable under capital gains tax provisions as per section 118-25 of the ITAA 1997? | A3: No, as you no longer hold trading stock for the purposes of carrying on a business in Australia. | Q4: Are you entitled to a deduction for the value of your opening trading stock as at 1 July 2015 under section 70-35 of the ITAA 1997? | A4: Yes | Q5: Are you entitled to a deduction for the trading stock purchases made from 1 July 2015 to when you ceased to be an Australian resident under section 8-1 of the ITAA 1997? | A5: Yes | Q6: Are you required to value closing stock under section 70-35 of the ITAA 1997 for the 2015-16 income year? | A6: Not applicable, as you do not hold trading stock on this date for the purposes of Division 70 of the ITAA 1997.

Relevant facts and circumstances: You became an Australian resident for tax purposes in mid-late 20XX. In late 20XX you ceased to be an Australian resident. You established a new residence in Country Y You purchased and sold shares while you were an Australian resident and treated these as trading stock. All of these shares and bonds have a foreign source. After late 20XX you continue to own shares and bonds, with a foreign source, as a foreign resident.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 70-110 | Income Tax Assessment Act 1997 section 104-160 | Income Tax Assessment Act 1997 section 104-165

Reasons for decision: Summary: You requested a ruling on whether CGT event I1 occurs when you become a foreign resident on the shares you held as trading stock. Section 104-160 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where an individual ceases to be an Australian resident, CGT event I1 happens and a capital gain or loss may occur for each CGT asset that is not taxable Australian property. However, a gain or loss is disregarded under section 118-25 of the ITAA 1997 where the relevant CGT asset is trading stock. In your case, as an Australian resident you recognised your shares under the trading stock rules in Division 70 of the ITAA 1997. Therefore any capital gain or loss in respect of your trading stock is disregarded. For shares that are regarded as trading stock, the proceeds of sale are properly accounted for as ordinary income under section 6-5 of the ITAA 1997. An outgoing incurred in connection with acquiring an item of trading stock is deductible under section 8-1 of the ITAA 1997. From late 20XX you ceased to be an Australian resident. Subsection 6-5(3) of the ITAA 1997 provides that your assessable includes ordinary income you derived directly or indirectly from all Australian sources during the income year. As a foreign resident you will not include proceeds from share sales as assessable income or claim deductions that have a foreign source. The source of your shares and bonds is not in connection with Australia. You no longer have trading stock under Division 70 as you have ceased carrying on a business in Australia. Section 70-80 provides that if an item stops being your trading stock for certain reasons, an amount is generally included as assessable income to balance the reduction in trading stock on hand, which is a transaction on revenue account. Section 70-110 of the ITAA 1997 applies when you stop holding an item as trading stock but still own it. Under this section you are treated as if just before the item stopped being trading stock, you had sold it to someone else (at arm's length and in the ordinary course of business) for its cost and you immediately bought it back for the same amount. This amount is assessable income. In your case, purchases and sales of shares and bonds in the period you are an Australian resident would be included in working out your assessable income and deductions under trading stock rules. When you cease to be an Australian resident, you no longer hold trading stock, the cost of the shares and bonds you still own will be included in assessable income because of section 70-110 of the ITAA 1997. As a result no closing stock value (at end of income year) is required under section 70-35 of the ITAA 1997.