Private ruling: Capital gains tax provision and double tax agreements
Published: April 2013
Ruling period: Year ended 30 June 2013
Date scheme commenced: 1 July 2012

Ruling: Questions and answers: | 1. Are you entitled to disregard in full any capital gain or loss that resulted from the disposal of your property in country D? | No. | 2. Are you entitled to disregard in part any capital gain or loss that resulted from the disposal of your property in country D? | Yes.

Relevant facts and circumstances: This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling. You were born in country D. You and your spouse purchased a property (property X) in country D post 20 September 1985, which you occupied as your main residence. The land adjacent to the dwelling is less than 2 hectares. After a number of years, you arrived in Australia as a student. After a period you became a resident of Australia for income tax purposes. After a period you and your spouse purchased a property in Australia (property Y), which you occupied as your main residence. Although you jointly purchased property Y your spouse remained in country D and continued to reside in your home in country D. After a period you separated from your spouse. After a period you became an Australian citizen. Soon after, you and your spouse divorced. As a result of the marriage breakdown a court order was issued by an Australian family law court. Contained within the court order was a direction that the family home in country D be disposed of, with the proceeds being divided between you and your ex-spouse. The property in country D was subsequently disposed of. You have paid tax to the country D authorities as a result of the disposal of the property. You will elect your Australian property to be your main residence upon acquisition.

Relevant legislative provisions: Income Tax Assessment Act 1997 Subsection 6-5(2) | Income Tax Assessment Act 1936 Section 102-20 | Income Tax Assessment Act 1936 Section 118 -145 | Income Tax Assessment Act 1936 Section 118-185 | Income Tax Assessment Act 1936 Section 115-5

Reasons for decision: Detailed Reasoning - Capital gains tax (CGT): Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that you make a capital gain or loss if a capital gains tax (CGT) event occurs to a CGT asset. Under section 108-5 of the ITAA 1997, a CGT asset includes any kind of property. Your home in China is therefore a CGT asset and under 104-10 of the ITAA 1997 its sale resulted in CGT event A1. | Detailed Reasoning - Arriving in Australia and taxable Australian property: There are special rules that apply to new residents of Australia so that the capital gains provisions only commence to apply from the time they became a resident of Australia. If an individual becomes an Australian resident, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident. However, the rules do not apply to pre-CGT assets or assets that are taxable Australian property, such as property located in Australia. If you became an Australian resident on or after 12 December 2006, you are taken to have acquired assets that were not taxable Australian property, such as an overseas property, at the time you became an Australian resident. In your case, your property in country D will not be a taxable Australian property prior to you becoming an Australian resident. However when you became a resident of Australia, your country D property is taken to have been acquired for its market value from this date for CGT purposes. In your case, your property in country D will not be a taxable Australian property prior to you becoming an Australian resident. However when you became a resident of Australia in 2009, your property became taxable Australian property and is taken to have been acquired for its market value from this date. Therefore CGT provisions will apply to your property located in country D from the date that you became a resident of Australia in 2009. | Detailed Reasoning - Main residence exemption: Generally you can disregard a capital gain or capital loss made on the disposal of a property that is your main residence if: · the property was your main residence for the whole period you owned it · the property was not used to produce assessable income, and · any land on which the dwelling is situated is not more than 2 hectares. In some cases you can choose to have a dwelling treated as your main residence even though you no longer live in it. You can only make this choice for a dwelling that you have first occupied as your main residence. If you make this choice, you cannot treat any other dwelling as your main residence for that period. | Detailed Reasoning - Absence rule: Subsection 118-145(1) of the ITAA 1997 provides that a taxpayer can make an election to continue to treat a dwelling as their main residence even though it has ceased to be so. The choice can be made for a total of up to 6 years. If an individual does elect to treat a dwelling as their main residence after they have moved out of it, no other dwelling can be treated as their main residence during the same period. | Detailed Reasoning - Main residence for only part of ownership period: If a CGT event happens to a dwelling you acquired on or after 20 September 1985 and that dwelling was not your main residence for the whole time you owned it, you are only entitled to a partial main residence exemption. | Detailed Reasoning - Your circumstances: In your case, you and your ex-spouse purchased a property in country D and occupied it for a number of years as your main residence, until you moved to Australia. While in Australia you became an Australian resident, therefore property X became taxable Australian property as of this date. After moving to Australia, you and your ex-spouse purchased property Y and you occupied this property and will elect it to be your main residence from date of purchase. Although you did not occupy your home in country D for a period, you are still entitled to elect this property as your main residence for a period of up to 6 years under section 118-145(1). However, as you will elect for property Y to be your main residence from the date of its purchase, you are not entitled to elect property X as your main residence from this date. This is because you are not entitled to elect 2 main residences. Therefore, you are entitled to disregard in part any capital gain or loss that has resulted from the disposal of property X. This period will be from the date that you became an Australian resident until the date that you purchased property Y. Accordingly, are not entitled to apply the main residence exemption on your country X property for the period from the date of purchase of property Y to the date your property in property X was disposed of. | Detailed Reasoning - Special cost base rules: If an individual becomes an Australian resident, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident. However, the rules do not apply to pre-CGT assets or assets that are taxable Australian property, such as property located in Australia. As previously mentioned, if you became an Australian resident on or after 12 December 2006, you are taken to have acquired assets that were not taxable Australian property, such as an overseas property, at the time you became an Australian resident. Therefore, the first element of the cost base and reduced cost base of an asset is its market value at the time the taxpayer becomes a resident. In your case, your property in country X became taxable Australian property when you became an Australian resident. Therefore under the special cost base rules it taken to have been acquired for its market value from that date. | Detailed Reasoning - Calculating your partial capital gain: Under subsection 118-185(2) of the ITAA 1997, a partial exemption is allowed based on the number of days the dwelling was your main residence. The assessable portion of the capital gain is calculated using the following formula: Capital gain or Capital loss amount × Non-main residence days Total days In your case the 'total days' will be from the date you became and Australian resident to the date property X was disposed, and the 'non main resident days' will be the period from date property Y was purchased to the date property X was disposed of. Once you calculate the amount that will be subject to CGT, you will then need to apportion any capital gain or loss according to your ownership interest. | Detailed Reasoning - CGT discount: Under section 115-5 of the ITAA 1997, you make a discount capital gain if the following requirements are satisfied: a) you are an individual, a trust or a complying superannuation entity b) a CGT event happens to an asset you own c) the CGT event happened after 11.45am (by legal time in the ACT) on 21 September 1999 d) you acquired the asset at least 12 months before the CGT event, and e) you did not choose to use the indexation method. Under the discount method you reduce your capital gain by the discount percentage. For individuals, the discount percentage is 50%. However, you can reduce the capital gain only after you have applied all the capital losses for the year and any unapplied net capital losses from earlier years. As you have owned property X for a period of greater than 12 months, and you have satisfied the other relevant requirements provided under section 115-5 of the ITAA 1997, you will be able to apply the 50% discount after you have calculated your assessable capital gain and applied all the capital losses for the year and any unapplied net capital losses from earlier years. | Detailed Reasoning - Marriage breakdown: Where you transfer an asset to your spouse as a result of a marriage breakdown, there is automatic CGT rollover in certain cases. If the rollover applies, the spouse transferring the asset disregards any capital gain or capital loss they make on the transfer. The spouse to whom the asset is transferred makes the capital gain or capital loss when they eventually dispose of the asset. In your case, there will be no transfer of property to your former spouse. Therefore, marriage breakdown rollover provisions will not apply and any capital gain or loss you make on the disposal of the property cannot be disregarded. | Detailed Reasoning - Double tax agreement (DTA): In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements. Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the 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 D Agreement is listed in section 5 of the Agreements Act. The country D agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The country D agreement operates to avoid the double taxation of income received by residents of Australia and country D. Article 13 of the country D agreement advises that income or gains derived by a resident of Australia from the alienation of real property situated in China is taxable in Australia and may also be taxable in country D. Therefore any capital gain or loss that results from the disposal of your property in country D is assessable in Australia under section 102-20 of the ITAA 1997. | Detailed Reasoning - DTA Relief: Article 23 of the country D agreement sets out the basis on which each country will provide relief from double taxation where tax had been paid in accordance with the Agreement Act. Australia will provide foreign tax credits for the country D tax paid, where the country D has been imposed in accordance with the convention. Your capital gain or loss was derived from the disposal of real property located in country D and therefore was taxable in country D. Since you paid tax on this income in country D in accordance with the country D Agreement, a foreign tax credit is allowable for this income. | Detailed Reasoning - Note: While it is acknowledged that your property in China is not an investment property and therefore has not earned any assessable income, subdivision 118-B of the ITAA 1997 provides that you are only entitled to elect one main residence at any one time to apply the main residence exemption.