Private ruling: Realisation of a capital loss on cessation of residency
Date of advice: 22 January 2018
Published: June 2018
Ruling period: Year ended 30 June 2017 | Year ending 30 June 2018 | Year ending 30 June 2019 | Year ending 30 June 2020
Date scheme commenced: 1 July 2016

Ruling: Q1: Did you make the choice to disregard your 2010-11 capital loss pursuant to section 104-165(2) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: No | Q2: Is your 2010-11 capital loss available to be carried forward to be offset against future capital gains? | A2: Yes

Relevant facts and circumstances: You are an individual that was employed by an entity during the income year ended 30 June 2011 and had been for some years prior. In the income year ended 30 June 2011, you relocated to another country, with no intention of returning to Australia. You ceased to be an Australian resident for taxation purposes in the income year ended 30 June 2011. At the time, you held no relevant CGT assets, other than shares you acquired pursuant to your employee share scheme. Your receipt of these shares has been correctly disclosed in your relevant taxation returns. Your 2011 income tax return was prepared and filed by a tax agent when you were living in another country. The return included the following statement: ● The taxpayer did not have a CGT event during the year. You resumed Australian residency during the income year ended 30 June 2015 and on your return you appointed a new tax agent. In a meeting with your new tax agent, you became aware that under section 104-160 of the ITAA 1997, CGT event I1 happened when you ceased to be an Australian resident. The result of CGT event I1 happening was that you had a capital loss in the year ended 30 June 2011. On identification of the issue, you sought to rectify the situation by preparing a submission to the Commissioner of Taxation notifying him of the error in the 2011 income tax return.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 102-23 | Income Tax Assessment Act 1997 subsection 103-25(1) | Income Tax Assessment Act 1997 subsection 103-25(2) | Income Tax Assessment Act 1997 section 104-160 | Income Tax Assessment Act 1997 section 104-165

Reasons for decision: Summary: CGT event I1 is triggered when you cease to be an Australian resident for tax purposes (section 104-160 ITAA 1997). Under subsection 104-165(2) of the ITAA 1997, an individual can choose to defer capital gains or losses made as a result of CGT event I1 until a subsequent event occurs in relation to those assets. The choice must be made by the time the income tax return for the relevant year is lodged or within a further time allowed by the Commissioner (subsection 103-25(1) of the ITAA 1997). Subsection 103-25(2) of the ITAA 1997 provides that the way you prepare your income tax returns is sufficient evidence of the making of the choice. In your case, you failed to make any choice, or a valid choice as your 2010-11 income tax return declared that you did not have a CGT event during the year. As per section 102-23 of the ITAA 1997, a CGT event still happens even if a capital gain or capital loss from the event is disregarded. In order for you to choose to disregard the capital gain or loss arising from CGT event I1, you would need to disclose that a CGT event had occurred in your 2011 income tax return. As you did not declare that a CGT event occurred in the 2011 income tax return, you have failed to make a valid choice to disregard the capital gains and losses that arose pursuant to CGT event I1 when you ceased to be a taxation resident of Australia. Generally, you make a capital loss if your reduced cost base is larger than your capital proceeds. The excess is your capital loss. Current year capital losses can be applied against any capital gains made during an income year to determine a net capital gain or net capital loss. A net capital loss that cannot be applied in an income year can be carried forward to a later income year. In other words, net capital losses can continue to be carried forward indefinitely and used to reduce future capital gains. In respect of your capital loss, it is sufficient to keep records of the capital loss with your taxation records and carry it forward until such a time as you have a capital gain to offset it against. It should be noted that, taxpayers must keep records of everything that affects their capital gains and capital losses. If a net capital loss is made, taxpayers must maintain records for five years after any capital gain is reduced by applying that capital loss.