Edited version of your written advice

Authorisation Number: 1012762129197

Ruling

Subject: Capital gains tax

Questions and answers

1. Are you entitled to a partial main residence exemption on the overseas property?

Yes.

2. Are you liable to amend your past Australian income tax returns to declare the foreign rental income

Yes.

3. Are you entitled to an Australian foreign income tax offset in respect of overseas tax paid the rental income?

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commenced on:

1 July 2014

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 came to Australia a number of years ago on a temporary visa.

You married an Australian a number of years later.

You were granted permanent residency the same year you were married.

Your spouse is an Australian citizen.

You acquired a half share in a property overseas along with your sibling a number of years ago when it was transferred from your parent into both your names.

Your sibling lived in the overseas property from when you and they acquired it for a few years.

You moved in when your sibling moved out and was there for a few years.

The overseas property was rented out for a number of years when you vacated it.

Your sibling received all of the rental income and paid overseas tax on the rental income.

Your sibling sent you amounts in recognition of your share of the property which you believe are gifts.

You have not declared these amounts in your Australian tax return and you have not paid any overseas tax on these amounts.

You and your spouse purchased a property in Australia.

The overseas property has been sold.

You elect for the overseas property to be your main residence up until its sale.

Your spouse is not electing the overseas property to be their main residence.

Relevant legislative provisions:

Income tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income tax Assessment Act 1997 section 118-10

Income Tax Assessment Act 1997 Division 770

Income tax Assessment Act 1997 Division 855-45

Reasons for decision

Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. However, where you are a foreign resident, your assessable income includes only income derived from an Australian source.

Capital gains tax

When you become an Australian resident there are rules relevant to each CGT asset that you owned just before you became an Australian resident, accept an asset that is taxable Australian property or that you acquired prior to 20 September 1985.

Division 855-45 of the ITAA 1997 states you acquire a property for CGT purposes for the market value on the date you become an Australian resident for taxation purposes.

An individual is a temporary resident of Australia if they:

• hold a temporary visa granted under the Migration Act 1958;

• are not an Australian resident within the meaning of the Social Security Act 1991, and

• do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

The Social Security Act 1991 defines an Australian resident as a person who resides in Australia and is an Australian citizen or the holder of a permanent visa.

In your case you came to Australia on a temporary partner's visa. As your spouse is a citizen of Australia and meets the definition of a resident under the Social Security Act you were a resident of Australia when you arrived in Australia.

Therefore you are taken to have acquired the overseas property, for CGT purposes on the day of your arrival for its market value on that date.

ATOID 2010/101 states that the ownership period of a dwelling in a foreign country includes the period it was owned by a taxpayer prior to the taxpayer becoming an Australian resident in relation to the main residence exemption for capital gains purposes.

Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) provides that a taxpayer makes a capital gain or loss as a result of a capital gains tax (CGT) event happening to a CGT asset. CGT assets include real estate acquired on or after 20 September 1985.

A taxpayer makes a capital gain if their capital proceeds from the sale of a CGT asset are greater than the cost base for the purchase of that asset, for example, if a taxpayer received more for an asset than they paid for it.

A taxpayer makes a capital loss if their reduced cost base for the purchase of that asset is greater than the capital proceeds resulting from the sale of that asset.

Capital gains tax is not a separate tax, it forms part of a taxpayer's assessable income and is taxed at each taxpayer's marginal tax rate.

The sale of a property results in a CGT event occurring. This is CGT event A1.

CGT - main residence

Section 118-110 of the ITAA 1997 provides that you can disregard a capital gain or capital loss made from a CGT event that happens to a dwelling that is your main residence. To qualify for full exemption, the dwelling must have been your main residence for the whole period you owned it, the ownership period, and must not have been used to produce assessable income.

For the main residence exemption to apply for your whole ownership period, you must move into the dwelling as soon as practicable after you acquire the dwelling.

In your case you did not move into the property as soon as practicable after you acquired it. You moved into the overseas property in XXXX and lived in it as your main residence until XXXX.

Therefore you are only entitled to a partial main residence exemption on the overseas property.

The Absence Rule

The absence rule allows a taxpayer to choose to treat a dwelling as their main residence even though they no longer live in it. A taxpayer cannot make this choice for a period before a dwelling first becomes their main residence.

This choice needs to be made in the income year that the CGT event happens to the dwelling for example, the year that a taxpayer enters into a contract to sell it.

If a taxpayer owns both a dwelling that they can choose to treat as their main residence after they no longer live in it, and a dwelling they actually lived in during that period of time then they make the choice in the income year they enter into the contract to sell the first of those two dwellings.

If a taxpayer makes this choice, they cannot treat any other dwelling as their main residence for that period.

Dwelling used to produce income

If a taxpayer does not use their dwelling to produce income, for example, it is left vacant or used as a holiday home then they can treat the dwelling as their main residence for an unlimited period after they stop living in it.

If a taxpayer does use their dwelling to produce income, for example, they rent it out or it is available for rent, they can choose to treat it as their main residence for up to six years after they stop living in it.

In your case you are taken to have acquired the overseas property for CGT purposes in late 200X.

From early 200Y you were renting the overseas property out up until it was sold in 20XX.

You elect for the overseas property to be your main residence for the period it was being rented out.

You are only entitled to a partial main residence exemption on the overseas property under section 118-185.

Special rules apply to the main residences of spouses. If you and your spouse are normally entitled to the exemption, your entitlement may be affected by whether you:

• both nominate the same dwelling as your main residence, or

• each nominate different dwellings as your main residence. 

If you both nominate the same dwelling as your main residence then you are both entitled to a full main residence exemption. 

In your case for the period you have two main residences one overseas and one in Australia. You are electing the overseas property to be your main residence. Your spouse is not making this election and therefore you both have different main residences for the period.

For this period you are only entitled to 50% exemption.

Rental income

Taxation Ruling TR 93/32 explains that the loss or income from a rental property must be shared according to the legal interest of the owners, except in those very limited circumstances where there is sufficient evidence to establish that the equitable interest is different from the legal title.

You and your sibling each received a half share in the overseas property when it was transfer into both your names from your parent.

Rental income must be attributed to each co-owner according to their legal interest in the property, despite any agreement between co-owners either oral or in writing stating otherwise.

In your case you and your sibling rented the overseas property out. Your sibling received all of the rental income and paid tax on this income in the overseas country.

Your sibling gave you various amounts which you believe are gifts in recognition of your ownership interest

You are required declare 50% of the rental income received, representing your ownership in the overseas property in your Australian tax returns from when you arrived in Australia when the property was sold.

You should amend your tax returns for the year ended 30 June 20YY and later to reflect the foreign rental income in the relevant years.

Foreign Income Tax Offset (FITO)

The foreign income tax offset (FITO) rules are designed to protect you from the double taxation that may arise where you pay foreign tax on income that is also taxable in Australia. This is achieved by allowing you to claim a tax offset where you have paid foreign tax on amounts included in your assessable income.

The FITO rules are contained in Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).

You can claim a tax offset for the foreign tax you have paid on income, profits or gains (including gains of a capital nature) that are included in your Australian assessable income. In some circumstances, the offset is subject to a limit.

To be entitled to a foreign income tax offset:

• you must have actually paid, or be deemed to have paid, an amount of foreign income tax

• the income or gain on which you paid foreign income tax must be included in your assessable income for Australian income tax purposes.

In your case you are not entitled to a FITO on the rental income received from the overseas property as you have not paid foreign tax on this amount and you have not included the income in your Australian tax return.

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