Private ruling: Capital gains tax discount for non-resident
Date of advice: 13 October 2016
Published: January 2017
Ruling period: Year ending 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Q1: To utilise the market value method as per subsection 115-115(4) of the Income Tax Assessment Act 1997 are you required to get a market value of the property as at DDMMYY? | A1: Yes. | Q2: For the purpose of subsection 115-115(5) of the ITAA 1997 is the excess amount the increase in value of the property from the date of acquisition to DDMMYY? | A2: Yes. | Q3: For the purpose of Subsection 115-115(5) of the ITAA 1997 is the discount capital gain capital proceeds minus the cost base? | A3: Yes. | Q4: Are you entitled to include in your cost base the market value of the property when your relative passed away? | A4: Yes.

Relevant facts and circumstances: You are a non-resident and have been a non-resident continuously since 19XX. Your relatives jointly purchased a pre-CGT property (the property). The property was your relative's main residence for their entire ownership period. You relative died in 19XX. Their share of the property was transferred to your other relative. Your other relative died in 19XX. The property was left to you and your sibling, under the Will as beneficiaries, as tenants in common. The property was transferred to you and your sibling in 19XX. The value of the property when transferred to you and your sibling was $XXX,XXX. Stamp duty and registration costs were incurred. Since the property was transferred to you and your sibling, the property has been rented out. You and your sibling have equally divided and declared the rental income and deductions. In 20XX you sold your 50% share of the property to your sibling, based on an independent valuation. You incurred expenses for stamp duty, valuation fees and registration costs for the transfer of the property to your sibling. You will be getting a valuation for the property as at DDMMYY.

Relevant legislative provisions: Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 section 115-115 | Income Tax Assessment Act 1997 subsection 115-115(2) to 115-115(6) | Income Tax Assessment Act 1997 section 128-15 | Income Tax Assessment Act 1997 subdivision B

Reasons for decision: Summary: Generally, foreign resident individuals are only subject to CGT on taxable Australian property, which includes residential and commercial real estate and mining assets. As these assets are immobile and produce location specific returns, the government considered that a reduction in the effective tax rate (by way of the CGT discount) would not be necessary to attract foreign investment in these assets. Accordingly, the government announced in the 2012/13 Federal Budget that the CGT discount would not apply to discount capital gains made by foreign residents. However, the discount continues to apply to the portion of the discount capital gain of a foreign or temporary resident individual that accrued up until the date of announcement (DDMMYY). Subdivision 115-B of the Income Tax Assessment Act 1997 (ITAA 1997) introduces legislation in regards to non-residents and the capital gains tax (CGT) discount. Any individuals who had a period of non-residency and disposed of a CGT asset after DDMMYY are no longer entitled to the full 50% CGT discount, and must now apportion their discount percentage. If an individual is a temporary or non-resident as at DDMMYY, they will only receive a discount for the gain from a CGT asset that accrued prior to DDMMYY. Section 115-115 of ITAA 1997 defines the four different scenarios and formulas available for calculating the CGT discount available for non-residents. Periods starting after DDMMYY Subsection 115-115(2) of ITAA 1997 will apply where the asset is acquired after DDMMYY. As your asset was acquired in 19XX, this formula is not available to you. Periods starting earlier - Australian residents Subsection 115-115(3) of ITAA 1997 will apply where the asset is acquired before DDMMYY, and you were an Australian resident on DDMMYY. As you were not a resident of Australia on DDMMYY, this formula is not available to you. Periods starting earlier - other resident may choose market value Subsection 115-115(4) of ITAA 1997 will apply where: ● the asset is acquired before DDMMYY, ● you were a foreign or temporary resident on DDMMYY, ● the most recent acquisition of the CGT asset happened on or before DDMMYY, ● the CGT asset's market value on DDMMYY exceeds the amount that was its cost base at the end of that day ● and you choose for this subsection to apply. You have stated that you will get a market value of the property as at DDMMYY and that the property's market value when acquired was $XXX,XXX. If the market value on DDMMYY does exceeds its cost base that day, and is equal to or great than the amount of the discount capital gain, then the 50% discount applies. If the amount falls short of the discount capital gain, then the percentage is calculated as per subsection 115-115(5) Excess + Shortfall × Number of apportionable days that you were an eligible resident Number of apportionable days 2 × Amount of the *discount capital gain Periods starting earlier - other residents not choosing market value Subsection 115-115(6) of ITAA 1997 contains the final formula, and will apply where the asset is acquired before DDMMYY, you were a foreign or temporary resident on DDMMYY, and subsection 115-115(4) of ITAA 1997 does not apply to you. The following formula, expressed as a percentage, is the discount percentage available to you. Number of apportionable days that you were an Australian resident (but not a temporary resident) 2 × Number of days in discount testing period Where: Discount testing period is the period the asset is owned by the individual. Apportionable day means a day, after DDMMYY, during the discount testing period. It is important to note that the percentage will be 0% if you were a foreign resident or temporary resident on each of the apportionable days. In your case, as you became a non-resident prior to the DDMMYY you will have zero apportionable days as an Australian resident. That is, after the DDMMYY, you were not an Australian resident for any of the days of the asset ownership period. Therefore, the discount percentage you are entitled to is 0%. The only calculation available to you that may produce a discount percentage is to choose the market value, as per subsection 115-115(4). The discount that may apply to your capital gains depends on the market value of the property as at DDMMYY. Therefore to determine any discount you can apply to your capital gains by using the market value method, you are required to obtain a market value of the property as at DDMMYY. When choosing to use the market value method, the discount percentage for the discount capital gain is calculated as follows: Step 1 - Calculate the CGT asset's 'excess'. The excess is the increase in value of the asset that has accrued prior to DDMMYY. It is calculated as the amount the CGT asset's market value at DDMMYY less its cost base at DDMMYY. If the excess is equal to or greater than the total discount capital gain from the CGT asset, the full discount percentage of 50% applies to the total gain. This is because the excess determine the capital gain that accrued prior to DDMMYY. This ensures that there is no reduction in the discount percentage where the value of the CGT asset has fallen between DDMMYY and the end of the ownership period. Step 2 - If the excess is less than the discount capital gain from the CGT event; that is the value of the CGT asset increased more after DDMMYY, the discount percentage is worked out using the following formula: Excess + Shortfall × Number of apportionable days that you were an eligible resident Number of apportionable days 2 × Amount of the *discount capital gain where: apportionable day means a day, after DDMMYY, during the discount testing period. eligible resident means an Australian resident who is not a temporary resident. excess means the excess as calculated in step 1. shortfall means the amount that the excess falls short of the amount of the discount capital gain. The discount capital gain is the capital proceeds minus the cost base. This process is to establish if the increase in market value occurred before DDMMYY or afterwards. In your situation it is important to note that you have no days where you are an eligible resident. The Explanatory Memorandum to the Tax Laws Amendment Bill (No. 2) of 2013 (Cth) for removing the capital gains tax discount for foreign individuals details an example using the market value method. Example 5.63 Dominic is a resident of France. On 1 January 2011 he purchased a property in Sydney for $1,000,000. On DDMMYY the property was valued at $1,100,000. On 1 July 2012 Dominic sold the property for $1,050,000. Dominic has a discount capital gain from the disposal of the property of $50,000. As Dominic is a foreign resident, the discount percentage applicable to the gain may be adjusted by this measure. For the purposes of determining the discount percentage, Dominic chooses to use the market value method. The discount percentage is worked out as follows: Calculate the CGT asset's excess. $1,100,000 - $1,000,000 = $100,000 As the amount of the gain accrued before DDMMYY of $100,000 is greater than the total discount capital gain of $50,000 from the disposal of property the full discount percentage of 50% applies. Section 115-5 of the ITAA 1997 details that a discount capital gain is a gain that meets the requirements of section 115-10, 115-15, 115-20 and 115-25. The basic requirements for a discount capital gain are: ● capital gains made by an individual ● made after 21 September 1999 ● not have an indexed cost base ● on an asset held for at least 12 months. Subsection 115-20(2) of the ITAA 1997 provides an example of calculating the discount capital gain. Example: In 1995 Elizabeth acquired land from her ex-husband under an order made by a court under the Family Law Act 1975 . His cost base for the land then was $40,000. In 2000, she sold the land for capital proceeds of $150,000. Her discount capital gain on the land is $110,000 (equal to the capital proceeds less the cost base for the land without indexation). You meet the requirements by being an individual, the gain was made after 21 September 1999, the cost base is not indexed and you acquired the asset at least 12 months before. Therefore your discount capital gain is the amount you received for your share of the property less the cost base. The cost base consists of five elements, as listed in Section 110-25 of the ITAA 1997. These elements are added together to calculate the cost base. Briefly these are: 1. Money paid or required to be paid for the property, including property given. 2. Incidental costs of acquiring the property, or costs in relation to the CGT event, for example, stamp duty, legal fees, agent's commission etc. 3. Costs of owning the asset such as rates, land taxes, repairs and insurance premiums. These costs can only be included if the asset was acquired after 20 August 1991. This does not include an amount that you have deducted or can deduct previously. 4. Capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs. 5. Capital expenditure you incur to preserve or defend your title or right to the asset. In accordance with Section 128-15 of the ITAA 1997, the cost base for the first element of a property that is passed to a beneficiary from a deceased estate is the market value of the property at the deceased's date of death. Therefore for your first element of the cost base, it is your share of the market value of the property at the date of your relative's death. You have advised that the value of the property at the date of your father's death was $XXX,XXX. You are entitled to include $XXX,XXX as the first element of your cost base.