ATO Interpretative Decision

ATO ID 2003/938

Income Tax

• This ATO ID contains references to repealed provisions, some of which may have been re-enacted or remade. The ATO ID is current in relation to the re-enacted or remade provisions.
  Australia's tax treaties and other agreements except for the Taipei Agreement are set out in the Australian Treaty Series. The citation for each is in a note to the applicable defined term in sections 3AAA or 3AAB of the International Tax Agreements Act 1953.

Issue

Is the taxpayer, a non-resident, assessable on a capital gain which arises from the sale of property situated in Australia under subsection 6-10(5) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

Yes. The taxpayer, a non-resident, is assessable on a capital gain which arises from the sale of property situated in Australia under subsection 6-10(5) of the ITAA 1997.

Facts

The taxpayer is a resident of Malaysia and a non-resident of Australia for income tax purposes.

The taxpayer owned real property situated in Australia.

The taxpayer sold the real property.

The capital proceeds from the sale exceeded the cost base of the real property.

Reasons for Decision

Section 6-10 of the ITAA 1997 provides that a taxpayer's assessable income includes statutory income amounts that are not ordinary income but are included in assessable income by another provision. The assessable income of a non-resident includes statutory income from all Australian sources as well as other statutory income that a provision includes in assessable income on some basis other than having an Australian source (subsection 6-10(5) of the ITAA 1997).

Section 10-5 of the ITAA 1997 lists the provisions about assessable income. Included in this list is section 102-5 of the ITAA 1997 which provides that a net capital gain is to be included in assessable income.

Section 102-20 of the ITAA 1997 provides that a taxpayer makes a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event.

Section 104-10 of the ITAA 1997 provides that CGT Event A1 happens if the taxpayer disposes of a CGT asset.

The real property owned by the taxpayer is a CGT asset (section 108-5 of the ITAA 1997).

Section 136-10 of the ITAA 1997 sets out the circumstances when a non-resident can make a capital gain or capital loss from a CGT event.

The table in section 136-10 of the ITAA 1997 provides that a capital gain or capital loss can only be made by a non-resident when CGT event A1 happens if the CGT asset has the necessary connection with Australia.

Category 1 of the table in section 136-25 of the ITAA 1997 provides that the following CGT assets have the necessary connection with Australia:

(a)

land, or a building or structure in Australia;

(b)

an interest in land in Australia, or a right, power or privilege to do with land in Australia;

(c)

a stratum unit in Australia, or an interest in a stratum unit in Australia;

(d)

a share in a company that owns a building on land in Australia that gives the taxpayer with a right to occupy a flat or home unit in the building.

As the real property owned by the taxpayer is situated in Australia, the property is a CGT asset that has the necessary connection with Australia. The taxpayer has disposed of the real property, CGT event A1 has therefore happened (subsection 104-10(1) of the ITAA 1997).

As the capital proceeds from the disposal are more than the property's cost base, the taxpayer has made a capital gain (subsection 104-10(4) of the ITAA 1997).

In determining liability to Australian tax on Australian sourced income by a non-resident, 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 ITAA 1997 so that those Acts are read as one.

Schedule 16 to the Agreements Act contains the double tax agreement between Australia and Malaysia (the Malaysian Agreement). Schedules 16A and 16B to the Agreements Act contain the protocols amending the Malaysian Agreement (the Malaysian Protocols). The Malaysian Agreement and the Malaysian Protocols operate to avoid the double taxation of income received by Australian and Malaysian residents.

Article 13 of the Malaysian Agreement (as amended by the Malaysian Protocol) deals with the alienation of property. It provides that income, profits or gains derived by a resident of Malaysia from the alienation of property situated in Australia may be taxed in Australia.

As the taxpayer has made a capital gain in relation to the disposal of the real property, section 102-5 of the ITAA 1997 provides that the net capital gain is included in assessable income. Therefore, the net capital gain received by the taxpayer forms part of their assessable income under subsection 6-10(5) of the ITAA 1997.

Year of income:  Year ended 30 June 2002 Year ended 30 June 2003

Legislative References:
Income Tax Assessment Act 1997
   section 6-10
   subsection 6-10(5)
   section 10-5
   section 102-5
   section 102-20
   section 104-10
   subsection 104-10(1)
   subsection 104-10(4)
   section 108-10
   section 136-10
   section 136-25

Keywords
Capital gains
Double tax agreements
Net capital gains
Malaysia

Siebel/TDMS Reference Number:  3479851

Business Line:  Public Groups and International

Date of publication:  17 October 2003

ISSN: 1445-2782