Private ruling: Foreign business losses and capital loss
Published: January 2014

Ruling: Questions and answers | 1. Are the foreign business losses you made recognised for Australian income tax purposes? | No. | 2. Is the foreign capital loss you made recognised for Australian income tax purposes? | No. | Year ended 30 June 2012 | Year ended 30 June 2013 | 1 July 2011

Relevant facts and circumstances: You are a citizen of country X. You lived in country X before moving to Australia. You entered Australia with a temporary visa which allows country X citizens to stay and work in Australia. You intend to live in Australia permanently but have not applied for permanent residency or citizenship to date. You became residents of Australia for taxation purposes from when you arrived in Australia. You indicated that you were a resident of Australia for tax purposes on your Australian income tax return for a year. You have not yet completed your Australian income tax return for the next tax year. When you were living in country X you ran a business with your spouse. The business made a loss in the relevant country X tax year and the loss was distributed to you and your spouse and included on your personal income tax returns. You indicated you were a resident of country X on your income tax return for the relevant country X tax year. The business also made a loss in the next tax year. The business has been sold and you made a capital loss on the sale.

Relevant legislative provisions: Income Tax Assessment Act 1997 - section 995-1 | Income Tax Assessment Act 1997 - Subdivision 768-R | Income Tax Assessment Act 1997 - section 768-910 | Income Tax Assessment Act 1997 - section 768-915 | Income Tax Assessment Act 1997 - Division 855 | International Tax Agreements Act 1953 section 4 | International Tax Agreements Act 1953 section 5

Reasons for decision: Detailed Reasoning - Temporary resident rules: In determining liability to Australian tax on foreign sourced income received, or foreign losses made, by individuals moving to Australia to live, it is necessary to consider the rules applying to 'temporary' residents of Australia. Subdivision 768-R of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes and also meet the requirements to be a temporary resident of Australia, you will be generally subject to the following temporary resident rules: · Any income you earn from an overseas source will not be taxed in Australia except income earned from employment performed overseas for short periods while you are a temporary resident (section 768-910 of the ITAA 1997). · Any capital gain you make from a capital gains tax event that relates to an asset located in an overseas country will not be taxed in Australia. · Special rules apply to capital gains on shares and rights acquired under employee share schemes. Section 995-1 of the ITAA 1997 states that you are a temporary resident of Australia if: · you hold a temporary visa granted under the Migration Act 1958 ; · you are not an Australian resident within the meaning of the Social Security Act 1991 ; and · your spouse is not an Australian resident within the meaning of the Social Security Act 1991 . Under the Social Security Act 1991 , an Australian resident is generally a person who resides in Australia and is either an Australian citizen or the holder of a permanent resident visa. In your case, you and your spouse are citizens of country X who arrived in Australia with temporary visas. You are not Australian citizens or the holders of permanent resident visas. Therefore, you have been a temporary resident of Australia since your arrival in Australia as you hold a temporary visa granted under the Migration Act 1958 and neither you nor your spouse are Australian residents within the meaning of the Social Security Act 1991 . You are subject to the temporary resident rules as you are also a resident of Australia for tax purposes. | Detailed Reasoning - Foreign business losses: You operated a business in country X. In the relevant country X income tax year, the business made a loss and your share of the loss was distributed to you and recorded on your personal income tax return. The business also made a loss in the following tax year. As a temporary resident of Australia, any foreign business income you receive or loss you make is disregarded for Australian tax purposes under section 768-910 of the ITAA 1997. Therefore, you are unable to claim the foreign business losses you made against your assessable income. | Detailed Reasoning - Double Tax Agreements: In determining liability to Australian tax on foreign sourced income received, or losses made, by a resident it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act). Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations). Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The country X Agreement is listed in section 5 of the Agreements Act. An article of the country X Agreement provides that the profits of an enterprise of country X will only be taxable in that country unless the enterprise carries on business in Australia through a permanent establishment situated therein. The country X Agreement specifies that the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on. In your case, you carried on a business in country X. Consequently, the business was an enterprise of country X and any profit or loss the business made is only assessable for tax purposes in country X. Therefore, you are unable to claim any foreign business losses you made against your assessable income under the double tax agreement between Australia and country X. | Detailed Reasoning - Deductibility of foreign capital loss: A capital loss can be used to reduce any capital gains you make in the current year or future years. It cannot be used to reduce the amount of your other assessable income. Section 768-915 of the ITAA 1997 specifies that a capital gain or loss you make from a CGT event is disregarded if: · you are a temporary resident when, or immediately before, the CGT event happens; and · you would not have made a capital gain or loss from the CGT event under Division 855 of the ITAA 1997 if you were a foreign resident when, or immediately before, the CGT event happens. Generally, Division 855 of the ITAA 1997 specifies that a foreign resident can disregard a capital gain or loss unless the relevant CGT asset is a direct or indirect interest in Australian real property, or relates to a business carried on by the foreign resident through a permanent establishment in Australia. In your case, you: · sold a foreign business which was an enterprise of country X; · were a temporary resident of Australia when the sale or CGT event happened; · made a capital loss from the CGT event; · would not have made a capital loss from the CGT event under Division 855 if you were a foreign resident, as the business was not Australian real property and it was not carried on through a permanent establishment in Australia. Therefore, the capital loss you made from the sale of the business is disregarded for Australian income tax purposes under section 768-915 of the ITAA 1997.