Edited version of private advice

Authorisation Number: 1051832323782

Date of advice: 4 May 2021

Ruling

Subject: Declaring foreign income from a tax refund

Question 1

Is the foreign tax refund received as a result of like-kind exchange treated as foreign income in the year it was received?

Answer

Yes.

Subsection 6-5(4) of the Income Tax Assessment Act 1997 (ITAA 1997) states:

In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.

The adoption of an appropriate method to determine when the income is derived under Sections 6-5 of ITAA 1997 in a relevant year of income is an issue of practical concern to taxpayers.

The refund was received on X and relates to the Y financial year as that is when it was derived.

The refund is to be included as foreign income in the Y financial year.

Question 2

Do you have to redo (amend) the income tax return for the Z financial year (date of contract) where the taxation body withheld the tax payable for the gain on selling the property because of the tax refund received in the Y financial year?

Answer

No.

The refund is not the result of overclaiming a foreign tax offset and is not income that needs to be declared in a previous period.

As per section 6-5 of the ITAA 1997, the foreign income will need to be included in the income tax return for the Y financial year and no amendment to the income tax return for the 2015-16 financial year is required as the payment was received on X.

This ruling applies for the following period:

30 June 20XX

The scheme commences on:

18 February 20XX

Relevant facts and circumstances

On X (effective date of contract letter), A for B signed a contract for sale for an investment property (Property 1) in C.

You are a non-resident of C.

As per C tax law, due to being a non-resident, upon settlement of Property 1 for $X, tax was withheld for a tax payable of C $X from the resultant capital gain in selling the property. A cheque was made payable and posted to the taxation body of C upon settlement in X.

The income tax return for the fund for the X financial year for the B was lodged in X. Your tax accountant included the sale of Property 1 in the X financial year as this was the year you made the sale based on the date you signed the contract (X).

The tax accountant calculated the applicable capital gain and have took the tax you paid in C as tax offset against overall tax payable made by B in the X financial year.

Settlement of Property 1 occurred in X of the X financial year, where you entered into a Y. This allowed you to reinvest the proceeds from the sale of Property 1 by purchasing another property of equal or greater value within a certain time limit.

You purchased X properties and the cost basis (total proceeds of the sale of Property 1) were split equally between the X properties, regardless of their original cost. This allowed you to defer capital gains tax for the property sold (Property 1), but meant tax maybe payable on a gain or may result in a capital loss when selling the exchanged properties, as the cost is based on the proceeds of sale of Property 1 split X between X exchanged properties.

In the X financial year you sold one of the exchanged properties (Property 2) based on a lower cost basis as per above and as a result you paid tax to the taxation body of C for overall income and a capital gain in C investments for C $X.

During the X financial year you sold the remaining exchanged property (Property 3) at a loss as it was based on a higher cost basis as per above.

As a result of the Y and reinvesting the proceeds of sale, upon lodgement of the C tax return for the X financial year, you ended up with a refund from the taxation body of C for the X financial year. The refund cheque for $X was deposited to your C bank account on X.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

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