Private ruling: Foreign exchange realisation
Published: August 2013
Ruling period: 1 July 2012 to 30 June 2014

Ruling: Question and answer | 1. Will a capital gains tax event occur when you sell an overseas residential property? | Yes. | 2. Will the main residence exemption apply to the capital gain in relation to the sale of your overseas residential property? | Yes. | 3. Will there be a foreign exchange realisation event when you transfer funds from your overseas bank account to Australia? | Yes | 4. Will there be an exemption available from the foreign exchange realisation event? | 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 and your spouse purchased a property overseas prior to becoming a permanent resident of Australia. You and your spouse became a permanent resident of Australia. You and your spouse moved to Australia. You and your spouse rented a property in Australia and have been living there for a year. You and your spouse have elected to keep treating the overseas property as your main residence. You are considering selling your overseas property and purchasing a property in Australia. You will hold the money in an overseas bank account and transfer it in instalments. You have not, as yet, opened a bank account overseas.

Relevant legislative provisions: Income Tax Assessment Act 1997 subsection 104-10(1) | Income Tax Assessment Act 1997 subsection 108-5(1) | Income Tax Assessment Act 1997 subsection 108-5(2) | Income Tax Assessment Act 1997 Section 118-10 | Income Tax Assessment Act 1997 subsection 118-145(1) | Income Tax Assessment Act 1997 Section 775-10 | Income Tax Assessment Act 1997 subsection 775-15(2) | Income Tax Assessment Act 1997 subsection 775-45(1) | Income Tax Assessment Act 1997 subsection 775-45(2) | Income Tax Assessment Act 1997 subsection 775-105(1) | Income Tax Assessment Act 1997 subsection 855-45(2)

Reasons for decision: Detailed Reasoning - Capital Gains Tax (CGT): A capital gain or loss will occur where a CGT asset is subject to a CGT event, and the capital proceeds from the event are greater than or less than the applicable cost base, respectively. CGT event A1, the disposal of a CGT asset subsection 104-10(1) of the Income Tax Assessment Act 1997 (ITAA 1997), takes place where a change of ownership occurs from the taxpayer to a different entity. The time of the event is taken to occur when any contract for the disposal is entered into, or where there is no contract, when the change of ownership occurs. CGT assets are defined in subsection 108-5(1) of the ITAA 1997. The definition is very broad and states that a CGT asset is (a) any kind of property; or (b) a legal or equitable right that is not property. Subsection 108-5(2) specifies that the following are CGT assets: · part of, or an interest in, any assets covered by items (a) or (b) above; · goodwill or an interest in it; · an interest in an asset of a partnership; and · an interest in a partnership other than an interest in a an asset of a partnership. Specific examples of CGT assets include land and buildings, shares in a company, units in a unit trust, options, debts owed to the taxpayer, rights to enforce contractual obligations and foreign currency. Real estate acquired on or after 20 September 1985 is a CGT asset. For Australian CGT purposes you are deemed to have acquired the property at market value on the day you became an Australian resident for taxation purposes (subsection 855-45(2) of the ITAA 1997). | Detailed Reasoning - Main residence exemption: Subdivision 118-B of the ITAA 1997 contains the rules for applying the CGT main residence exemption to the disposal of a property used as your main residence. As a general rule, the main residence exemption can only be applied to one dwelling at a time and if you own and occupy more than one dwelling in a particular period of time, you must choose which dwelling the main residence exemption will apply to. You make this choice in the income year in which the CGT event happens to the property you wish the exemption to apply to. Section 118-110 of the ITAA 1997 provides that the following conditions must be met to qualify for a full main residence exemption (a partial exemption may be available in cases where any of the conditions are not met): · the dwelling must have been your home for the whole period you owned it, · you must not have used the dwelling (or the land on which it is situated and adjacent to) to produce assessable income, and · the land on which the dwelling is situated must be 2 hectares or less. | Detailed Reasoning - Continuing to treat a dwelling as your main residence after it ceases to be your main residence: In some circumstances you may choose to have a dwelling treated as your main residence even though you ceased to use it as such (subsection 118-145(1) of the ITAA 1997.) You can continue to treat the dwelling as your main residence where you meet the following criteria: (a) At any time either: · You use the part of the dwelling that was your main residence for the purpose of producing assessable income (for example renting it out); up to a maximum of six years at any one time. · If you do not use the dwelling that was your main residence for the purpose of producing assessable income but leave it vacant, then you can extend the exemption indefinitely. (b) You do not treat any other dwelling as your main residence for the time you are applying the extension. (c) You make the necessary election(s) for the extension of the main residence period to that property. The election must be made either by the time you lodge your income tax return for the income year in which the relevant CGT event occurred or within such further time that the Commissioner allows. | 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 DTAs can be located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. The agreements operate to avoid the double taxation of income received by residents of Australia and an overseas country. Article 13 of an agreement advises that income or gains derived by a resident of Australia from the alienation of real property situated in an overseas country is taxable in Australia and may also be taxable in that country. | Detailed Reasoning - Foreign exchange: The Foreign Exchange (Forex) basic rule follows that your assessable income for an income year includes a Forex realisation gain you make as a result of a Forex realisation event that happens during the year. A Forex realisation event means any of the Forex realisation events described in Division 775. The exceptions to this rule are where your assessable income does not include a Forex realisation gain to the extent that it is (a) a gain of a private or domestic nature; and (b) is not covered by an item of the table as per subsection 775-15(2). One of the objects of Division 775 of the ITAA 1997 is to quantify a Forex realisation gain or loss solely by reference to the change in the Australian dollar value of rights and obligations (Section 775-10 of the ITAA 1997). There is no requirement for an actual conversion of foreign currency, any Forex realisation gain or loss will arise purely from a currency exchange rate effect which is described in subsection 775-105(1) of the ITAA 1997 as any currency exchange rate fluctuations. That is, a Forex realisation gain or loss arises from the comparison between the Australian dollar equivalent amounts of foreign currency at two points in time. | Detailed Reasoning - Forex realisation event 2 (FRE 2): You make a Forex realisation gain or loss only when a Forex realisation event happens. Subsection 775-45(1) of the ITAA 1997 provides that FRE 2 happens if an entity ceases to have a right, or part of a right, to receive foreign currency which is created or acquired in return for paying an amount of Australian currency or foreign currency. Subsection 775-45(2) of the ITAA 1997 provides that the time of FRE 2 is when the right or part of the right ceases. | Detailed Reasoning - Forex exemption: For most individual taxpayers Forex gains or losses will generally be ignored if the gain or loss is of a private or domestic nature as per section 775-15(2) of the ITAA 1997, but where the gain or loss results from carrying on a business or a profit-making undertaking or plan, the gain or loss will be assessable income or an allowable deduction. There is no definition for private or domestic in the Forex legislation. Each case is determined on the facts of individual arrangements. Therefore, in order to determine if a Forex gain is of a private and domestic nature we need to consider the use of the moneys to which the Forex event relates. | Detailed Reasoning - Capital Gains Tax: When you sell your overseas property (purchased post 1985) CGT event A1 will occur. You used your overseas residence as your main residence. The property has not been used for rental or any other business purposes and remains vacant. You have elected to keep treating this property as your main residence until it is sold. Therefore, any gain arising from CGT event A1 will be exempt from CGT. | Detailed Reasoning - Forex: Due to limitations put in place each person is only permitted to transfer a certain amount of funds out of the country per year; therefore the money you receive as a consequence of sale of your main residence will need to be deposited into an overseas bank account. The sole purpose of the bank account will be to hold the proceeds from the sale of your main residence. Accordingly, the funds are private and domestic in nature and exempt from the Forex rules.

Does Part IVA apply to this ruling?: Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable. | We have not considered the application of Part IVA to the arrangement you asked us to rule on.