Private ruling: Capital gains tax
Date of advice: 6 April 2017
Published: September 2017
Ruling period: Year ended 30 June 2016
Date scheme commenced: 1 July 2015

Ruling: Question and Answer | Can you disregard any capital gain or loss made on the disposal of your foreign property? | No.

Relevant facts and circumstances: On # you were a resident of country A and purchased a property there. You purchased the property for X. On # you left country A to study in another country. You rented out your property when you moved to the other country. You and your family entered Australia on # and became permanent residents. You continued to rent out your property when you moved to Australia. On # you sold your country A property for Y.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 6-5 | Income Tax Assessment Act 1997 Section 6-10 | Income Tax Assessment Act 1997 Section 102-10 | Income Tax Assessment Act 1997 Section 102-15 | Income Tax Assessment Act 1997 Section 102-20 | Income Tax Assessment Act 1997 Section 104-10 | Income Tax Assessment Act 1997 Section 118-185 | Income Tax Assessment Act 1997 Section 855-45 | International Tax Agreements Act 1953 Section 4 | International Tax Agreements Act 1953 Schedule 1 | International Tax Agreements Act 1953 Schedule 1 Article 13 | International Tax Agreements Act 1953 Schedule 1 Article 13(1)

Reasons for decision: Summary: Your assessable income includes income according to ordinary concepts, which is called ordinary income. If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct. Your assessable income also includes some amounts that are not ordinary income. Amounts that are not ordinary income, but are included in your assessable income by provisions about assessable income, are called statutory income. If an amount would be statutory income apart from the fact that you have not received it, it becomes statutory income as soon as it is applied or dealt with in any way on your behalf or as you direct. If you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia. In determining liability to Australian tax on foreign sourced income, 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 (the Agreements Act). Section 4 of the Agreements Act incorporates that Act with the Income Tax Assessment Act 1997 (ITAA) so that those acts are read as one. Schedule # to the Agreements Act contains the double tax agreement between Australia and country A Agreement. The country A Agreement operates to avoid the double taxation of amounts received by Australian and country A residents. Article # of the country A Agreement deals with the alienation of property, Article 13(1) of the agreement provides that; Income or gains derived by a resident of a Contracting State from the alienation of real property situated in the other Contracting State may be taxed in that other state. As you are an Australian resident for tax purposes in receipt of a capital gain from a country A property, the capital gain may be taxed in Australia and country A. Accordingly, the capital gain forms part of your assessable income in Australia. As you are a resident of Australia for tax purposes you can claim a Foreign Income Tax Offset in your Australian tax return on the tax paid in country A. Therefore you cannot disregard any capital gains or loss you make on the disposal of the country A property. An amount paid in foreign currency that is included in an element of the cost base is converted to Australian currency at the time of the relevant transaction or event. | Detailed Reasoning - CGT and residency: There are special capital gains tax (CGT) rules that apply if you become an Australian resident for taxation purposes. If an individual becomes an Australian resident for CGT purposes, 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. Under the special acquisition rule, 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. The special cost base rule provides that 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. A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as the disposal of a property. | Detailed Reasoning - Application of the law to your facts: In your case, you were the sole owner on the title of the property. You moved to Australia and the property was disposed of a number of years later. You made a capital gain on the disposal of your overseas property. For CGT purposes, you are taken to have acquired your overseas property (at market value in Australian dollars) on the date you became an Australian resident. The cost base of the overseas property is the sum of the following elements: The first element of the cost base is the market value of the overseas property in accordance with your ownership interest in the property, calculated as at the date you became a resident of Australia; The second element of the cost base includes selling costs and the cost of any valuation that you need to do for capital gains purposes; The third element is the costs of owning the CGT asset; The fourth element of the cost base is the cost of any capital improvements that you have made to the property since you became a resident of Australia, and The fifth element of the cost base is any capital expenses you incurred to preserve or defend your ownership of or your rights to the property after you became a resident of Australia. As the overseas property was your main residence for part of your ownership period, a partial main residence exemption will apply. You will need to apportion the capital gain made on the disposal of your overseas property using the following formula: Capital gain × Non-main residence days ÷ Days in your ownership period Note: For this calculation, your ownership period is based on actual ownership of the country A property.