Private ruling: Capital gains tax (CGT) on the sale of Australian property - market valuation - non-resident CGT discount
Published: October 2013
Ruling period: Year ending 30 June 2015
Date scheme commenced: 1 July 2014

Ruling: Q1: Do you use the average of the three valuations for the purposes of claiming the CGT discount for non-residents? | A1: No. | Q2: Is the methodology of your calculation of your capital gain correct? | A2: No.

Relevant facts and circumstances: You purchased a property in Australia some time after 20 September 1985. You incurred costs and fees at the time of purchase. The property became your main residence and you lived there for just over three months. You moved out of the property some time later and began renting it to tenants. You wish to make a choice to continue to treat the property as your main residence for a period of six years after you stopped living in it. You now reside overseas and are a non-resident of Australia for taxation purposes. You were also a non-resident on 8 May 2012 and you will not have any periods of residency between 8 May 2012 and the sale of the property. For the purpose of this private ruling, you will sell the Australian property and you will incur costs in respect of agent's fees and conveyancing fees. You have obtained a number of valuations of the property as at 8 May 2012. One was completed by a registered valuer. Two were completed by real estate agents who valued the property to be between certain amounts. Based on these valuations you have calculated the average value of the property. You wish to choose to calculate any CGT discount that you are entitled using the market value method. You have provided an example of the calculation of your capital gain and total tax payable. This example provides that you will make a capital gain and that the total tax payable will be a certain amount.

Relevant legislative provisions: Income Tax Assessment Act 1997 Section 102-20, | Income Tax Assessment Act 1997 Section 104-10, | Income Tax Assessment Act 1997 Section 110-25, | Income Tax Assessment Act 1997 Section 115-5, | Income Tax Assessment Act 1997 Section 115-10, | Income Tax Assessment Act 1997 Section 115-15, | Income Tax Assessment Act 1997 Section 115-20, | Income Tax Assessment Act 1997 Section 115-25, | Income Tax Assessment Act 1997 Section 115-105, | Income Tax Assessment Act 1997 Section 115-115, | Income Tax Assessment Act 1997 Section 116-20, | Income Tax Assessment Act 1997 Section 118-145 and | Income Tax Assessment Act 1997 Section 118-185.

Reasons for decision: Detailed Reasoning - Do you use the average of the three valuations for the purposes of claiming the CGT discount for non-residents?: The term market value, used in the context of income tax legislation, has its ordinary meaning. The Macquarie Dictionary provides that market value or market price means the price at which a commodity, security, or services is selling in the open market. A market value is a specified price rather than a range between prices or values. In your situation, you are not able to use the average of the three valuations that you have obtained as the two valuations that have been provided to you by the real estate agents are appraisals rather than valuations. The valuation that you have obtained from the registered valuer provides the market value of the property and this is the market value that should be used for the purpose of claiming the CGT discount for non-residents. | Detailed Reasoning - Is the methodology of your calculation of your capital gain correct?: The capital gain from the sale of a CGT asset, is calculated as the capital proceeds less the cost base of the asset. Capital proceeds is the term used to describe the amount you receive for the sale of the asset. The cost base consists of five elements. You need to add together all of these elements to calculate the cost base. Briefly these are: 1. Money paid or required to be paid for the property. 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 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. Once you have calculated the capital gain, you then need to apply any partial main residence exemption that you may be entitled to. When calculating any main residence exemption or partial main residence exemption the ownership period is from the date of settlement of the purchase to the date of settlement of the sale. A partial main residence is calculated using the following formula: total capital gain amount x non main residence days / days in your ownership period You then apply any current year or carried forward capital losses. The final step is to apply the CGT discount. The Government has introduced legislation to remove the availability of the CGT discount for non-resident and temporary resident individuals. This measure was originally announced as part of the Federal Budget on 8 May 2012 and the relevant legislation received Royal Assent on 29 June 2013. If you were a non resident on 8 May 2012 and you had acquired an asset prior to 9 May 2012 you are eligible to apply the CGT discount if you obtain a market valuation of your asset as at 8 May 2012. This enables you to still claim the CGT discount for the period prior to the announcement of the new measure. If you are eligible and choose 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 9 May 2012. It is calculated as the amount by which the CGT asset's market value at 8 May 2012 exceeds its cost base at 8 May 2012. - 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 as the total gain accrued prior to 8 May 2012. This ensures that there is no reduction in the discount percentage where the value of the CGT asset has fallen between 8 May 2012 and the end of the discounting test period (the day you acquired the CGT asset until the day it is sold). · 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 after 9 May 2012, the discount percentage is worked out using the following formula: Excess + ( Shortfall x number of apportionable days that you were an eligible resident) / Number of apportionable days) ________________________________________________________________ 2 x the amount of the *discount gain The shortfall is the net increase in the value of the CGT asset accrued after 8 May 2012. This is calculated by subtracting the excess (amount of the capital gain accrued prior to 9 May 2012) from the amount of the total discount capital gain. - The number of apportionable days means the number of days after 8 May 2012 during the discount testing period. - The number of apportionable days that you were an eligible resident is the number of days after 8 May 2012 during the discount testing period that the individual was an Australian resident (but not a temporary resident). Therefore, based on the example figures that you have provided the calculation of your capital gain will be as follows: | Detailed Reasoning - Calculations deleted.: Your net capital gain will need to be included as assessable income in your income tax return and will be taxed at the relevant marginal rate. Currently, if you are a non-resident for the full year, the following rates apply: The following rates for 2013-14 apply from 1 July 2013. | Detailed Reasoning - Tax on this income: 0 - $80,000 32.5c for each $1 $80,001 - $180,000 $26,000 plus 37c for each $1 over $80,000 $180,001 and over $63,000 plus 45c for each $1 over $180,000 Non-residents are not required to pay the Medicare levy. Please note that these rates may change in the future.