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Edited version of your written advice
Authorisation Number: 1051255101977
Date of advice: 21 July 2017
Ruling
Subject: Foreign Resident – Capital Gains – Non-portfolio shares - Taxable Australian Real Property
Question
Is any capital gain or loss the taxpayer made from the sale of the shares in the company disregarded?
Answer
Yes
This ruling applies for the following periods:
1 July 2016 to 30 June 2017
The scheme commences on:
1 July 2016
Relevant facts and circumstances
The taxpayer is a foreign resident of Australia for tax purposes.
The taxpayer owned 100% of the shares in an Australian private company. The company is engaged in a business in Australia.
On a date in 201X, the taxpayer sold all their shares in the company to an independent third party.
Prior to the sale none of the assets of the company were Australian Real Property.
Relevant legislative provisions
Division 855 of the Income Tax Assessment Act 1997
Reasons for decision
Summary
The sale of the shares in the company will not be subject to capital gains tax (CGT) as the taxpayer is a foreign resident for Australian tax purposes and the shares are not Taxable Australian Property (TAP).
Detailed reasoning
The Double Tax Agreement (DTA) is a treaty between Australia and another country that establishes the circumstances in which each country has the right to tax the income of a taxpayer who may have tax obligations to both countries. The DTA sets out the circumstances in which a transaction will be subject to Australian tax, while the Australian domestic tax laws state how tax will be applied to the transaction. As a foreign resident who owns 100% of a company conducting business in Australia, the DTA tells us that the sale of the shares in the company will be subject to Australian tax law.
The taxpayer held their shares in the company on capital account. When they sold their shares a CGT event happened. While the company itself is a resident of Australia, the shares in the company were held by a foreign resident. Foreign residents are only subject to CGT when a CGT event happens to an asset of theirs that is TAP. Where an asset is not TAP, any capital gain or loss will be disregarded.
TAP includes CGT assets that are indirect Australian Real Property Interests. A share in a company will be an indirect Australian real property interest where it is a non-portfolio interest and its underlying value is derived principally from Australian real property. As the taxpayer owned and controlled 100% of the company, their shareholding was a non-portfolio interest. However, as the company holds no Australian real property the shares cannot be an indirect real property interest.
The shares in the company are not TAP. Consequently any gain that the taxpayer made on the sale of the shares in the company will be disregarded.
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