Edited version of private ruling

Authorisation Number: 1011622746755

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Ruling

Subject: Capital gains tax - Shares

1. Is the capital gain or capital loss made on the disposal of your Australian private company shares a capital gains tax (CGT) event in accordance with section 104-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Yes.

2. Is the capital gain or capital loss made on the disposal of your Australian private company shares disregarded in accordance with section 855-10 of the ITAA 1997?

No.

This ruling applies for the following period:

1 July 2010 - 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You ceased to be a resident of Australia prior to 12 December 2006.

Prior to ceasing Australian tax residency, you held shares in a private Australian company (the shares).

At the time you ceased to be a resident of Australia for tax purposes you made a choice to disregard any capital gain or capital loss arising from CGT event I1 in relation to the shares

You sold you're the shares during the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-165(2)

Income Tax Assessment Act 1997 Subsection 104-165(3)

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1997 Section 855-15

Income Tax (Transitional) Act 1997 Section 104-165.

Reasons for decision

You make a capital gain or capital loss as a result of a CGT event. The two main CGT events that are relevant to your situation are CGT event A1 and CGT event I1.

CGT event A1 - disposal of a CGT asset

CGT event A1 occurs when you dispose of a CGT asset. You dispose of a CGT asset if a change in ownership occurs from you to another entity.

CGT event I1 - when an individual or company stops being a resident of Australia

Changes to the way CGT event I1 applies occurred when Tax Laws Amendment (2006 Measures No.4) Bill 2006 received royal assent on 12 December 2006.

The previous reading of section 104-160 of the ITAA 1997 stated that CGT event I1 occurs when an individual ceases to be an Australian resident. The time of the event is when the individual ceases to be an Australian resident. Calculations of capital gains or capital losses must be done for each CGT asset just before the CGT event happens except one having the necessary connections with Australia. 

Subsection 104-165(2) of the ITAA 1997 enables any individual ceasing to be an Australian resident to choose to disregard making a capital gain or capital loss on assets covered by CGT event I1. However, under the previous reading of section 104-165(3) (ITAA 1997), these assets will then be deemed to have the necessary connection with Australia until either a CGT event happens in relation to the asset or the individual again becomes an Australian resident.

In your situation, you chose to disregard a capital gain or capital loss on your shares when you ceased to be an Australian resident for tax purposes.

However, since making this choice Tax Laws Amendment (2006 Measures No.4) Bill 2006 received royal assent and the respective legislation requirements were changed. The amended legislation required the CGT asset to be 'taxable Australian property' rather than having the 'necessary connection with Australia'.

Taxable Australian Property

Taxable Australian property has the meaning given by section 855-15 of the ITAA 1997 which lists 5 categories of CGT assets that are taxable Australian property. They are set out in this table.

Transitional provisions of the law

Where a taxpayer, prior to the date of Royal Assent for the Bill, had made a choice upon ceasing to be an Australian resident under subsection 104-165(3) of the ITAA 1997 to disregard the capital gain or capital loss on assets covered by CGT event I1, then the effect of that choice will remain in force. That is, assets that were taken to have the necessary connection with Australia will now be taxable Australian property. This ensures that gains accrued while the owner was a resident of Australia cannot be avoided by the owner acquiring foreign resident status.

Conclusion

Therefore, when you stopped being a resident of Australia you chose to disregard the capital gain or capital loss on your Shares that had the necessary connection with Australia. You have now sold these shares and the legislation has changed to disregard a capital gain or capital loss from CGT events if it is in relation to a CGT asset that is not taxable Australian property (section 885-10 of the ITAA 1997). However, as per transitional provisions, where you made a choice upon ceasing to be an Australian resident to disregard the capital gain or capital loss, then the effect of that choice will remain in force and the asset that is taken to have the necessary connection with Australia will now be taxable Australian property.

Therefore, as you have chosen not to return a notional capital gain or capital loss at the time you ceased being a resident of Australia for tax purposes, you will make a capital gain or capital loss under CGT event A1 when you disposed of the shares. Furthermore, section 855-10 of the ITAA 1997 does not allow you to disregard the capital gain or capital loss as the CGT asset is considered taxable Australian property.

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