Disclaimer
This edited version has been archived due to the length of time since original publication. It should not be regarded as indicative of the ATO's current views. The law may have changed since original publication, and views in the edited version may also be affected by subsequent precedents and new approaches to the application of the law.

You cannot rely on this record in your tax affairs. It is not binding and provides you with no protection (including from any underpaid tax, penalty or interest). In addition, this record is not an authority for the purposes of establishing a reasonably arguable position for you to apply to your own circumstances. For more information on the status of edited versions of private advice and reasons we publish them, see PS LA 2008/4.

Edited version of private ruling

Authorisation Number: 1011646309730

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Capital gains tax (CGT) - shares

1. Is the capital gain or capital loss made on the disposal of your Australian private company shares a 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?

Yes.

This ruling applies for the following period:

1 July 2010 - 30 June 2011

The scheme commences 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to be a resident of Australia for tax purposes the shares had the necessary connection with Australia as per the now repealed section 136-25 of the ITAA 1997.

The shares in the company were not taxable Australian real property by reference to section 855-20 of the ITAA 1997.

The shares in the company were never a CGT asset that was an indirect Australian real property interest by virtue of section 855-25 of the ITAA 1997. This is because the company had at all times failed the principal asset test of section 855-30 of the ITAA 1997 as the market values of the company's assets that were taxable Australian real property never exceeded the sum of the market values of its assets that were not taxable Australian real property.

The shares in the company were not used at any time in carrying on a business through a permanent establishment (within the meaning of section 23AH of the Income Tax Assessment Act 1936 (ITAA 1936)) in Australia.

The shares in the company were never an option or right to acquire a CGT asset.

At the time you ceased to be a resident of Australia a choice was not required to be made under subsection 104-165(3) of the ITAA 1997.

You sold the shares during the 2010-11 income year.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 23AH

Income Tax Assessment Act 1936 Subsection 103A(1)

Income Tax Assessment Act 1936 Subsection 103A(2)

Income Tax Assessment Act 1936 Subsection 103A(3)

Income Tax Assessment Act 1936 Section 117

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Subsection 104-160(1)

Income Tax Assessment Act 1997 Subsection 104-160(2)

Income Tax Assessment Act 1997 Subsection 104-160(3)

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 Assessment Act 1997 Section 855-20

Income Tax Assessment Act 1997 Section 855-25

Income Tax Assessment Act 1997 Section 855-30

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

Reasons for decision

Question 1

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.

A CGT asset is:

In your case, your shares are property consequently they are considered a CGT asset.

Therefore, when you disposed of the shares CGT event A1 occurred in accordance with section 104-10 of the ITAA 1997.

Question 2

Subsection 855-10(1) of the ITAA 1997 disregards a capital gain or loss from a CGT event if:

In your case, you are a foreign resident of Australia for taxation purposes.

Therefore, for the capital gain to be disregarded, the shares must not constitute taxable Australian property.

Taxable Australian Property 

There are five categories of CGT assets that are taxable Australian property. They are set out in the table in section 855-15 of the ITAA 1997 as follows:

Item

Description

1

Taxable Australian real property

2

A CGT asset that:

is an indirect Australian real property interest; and

is not covered by item 5 of this table

3

A CGT asset that:

you have used at any time in carrying on a business through a permanent establishment (within the meaning of section 23AH of the Income Tax Assessment Act 1936) in Australia; and

is not covered by item 1, 2 or 5 of this table

4

An option or right to acquire a CGT asset covered by item 1, 2 or 3 of this table

5

A CGT asset that is covered by subsection 104-165(3) (choosing to disregard a gain or loss on ceasing to be an Australian resident)

Item 1 - Taxable Australian real property

Section 855-20 of the ITAA 1997 sets out that a CGT asset is taxable Australian real property if it is:

Your shares do not satisfy the definition of taxable Australian real property as they are neither real property (within the ordinary meaning of that term) nor a mining, quarrying or prospecting right.

Item 2 - Indirect Australian property interest

An indirect Australian property interest as defined in section 855-25 of the ITAA 1997 will only exist where a foreign resident has membership interest in an entity and that entity passes two tests:

In your case, your shares had at all times failed the principal asset test as the market values of the company's assets that were taxable Australian real property never exceeded the sum of the market values of its assets that were not taxable Australian real property. Therefore, the shares were never an indirect Australian real property interest.

Item 3 - A CGT asset used in carrying on a business

The shares in the company were not used at any time in carrying on a business through a permanent establishment in Australia.

Item 4 - Option or right to acquire a CGT asset

The shares do not constitute an option or right to acquire a CGT asset.

Item 5 - CGT asset covered by section 104-165(3)

Section 104-165(3) of the ITAA 1997 states that if a capital gain under CGT event I1 is chosen to be disregarded, the CGT asset is taken to be taxable Australian property until the earlier of:

However, since you ceased to be an Australian resident the tax rules in relation to a CGT event I1 have changed. 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. 

In your case, the shares had the necessary connection with Australia therefore at the time you ceased to be a resident of Australia a choice was not required to be made under subsection 104-165(3) of the ITAA 1997 to disregard the capital gain.

As a result the shares were not covered by section 104-165(3) of the ITAA 1997.

Conclusion

As all the five tests have failed the shares are not considered taxable Australian property. Therefore, under section 855-10(1) of the ITAA 1997, any capital gain or loss made from the sale of the shares is disregarded.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).