Edited version of private ruling

Authorisation Number: 1011748904655

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Ruling

Subject: Capital gains tax and the sale of overseas property

Questions and Answers

Will capital gains tax (CGT) apply to the sale of your overseas property?

Yes.

Are there any exemptions if you were not an Australian resident at the time of the purchase of the property?

No.

Are you eligible to apply the CGT 50% discount to any capital gain made from the sale of your overseas property?

Yes.

Will you make any capital gain or capital loss in the income year in which you sign the contract for the sale of the overseas property?

Yes.

Is any capital gain or capital loss that you make on the sale of the overseas property converted to Australian dollars at the actual rate that applied at the time of the CGT event?

Yes.

Is a gain or loss that is attributable to a currency exchange rate effect (a forex realisation gain or loss) taken into account for the purposes of the CGT provisions?

Yes.

This ruling applies for the following periods:

Year ending 30 June 2011

Year ending 30 June 2012

The scheme commences on:

1 July 2010

Relevant facts and circumstances

Some time after 20 September 1985, you and your spouse purchased a vacant block of land in an overseas country (herein referred to as the property).

You and your spouse both have an equal share in the property.

You and your spouse were residents of the overseas country at the time the property was purchased.

You and your spouse secured a loan to pay for the property.

You and your spouse moved to Australia some time later.

You became a resident for taxation purposes several years ago, when you started working.

You became an Australian citizen some time later.

In the time that you and your spouse have owned the property, you both have continued to pay rates and taxes in the overseas country however neither you nor your spouse have claimed any deductions in your Australian income tax returns.

You are now considering selling the property and have listed the sale price in accordance with council valuations.

You and your spouse will incur real estate commission fees and other legal costs relating to the sale of the property.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-20,

Income Tax Assessment Act 1997 Section 104-10,

Income Tax Assessment Act 1997 Section 110-25,

Income Tax Assessment Act 1997 Section 110-55,

Income Tax Assessment Act 1997 Section 115-5,

Income Tax Assessment Act 1997 Section 115-10,

Income Tax Assessment Act 1997 Section 115-15,

Income Tax Assessment Act 1997 Section 115-20,

Income Tax Assessment Act 1997 Section 115-25,

Income Tax Assessment Act 1997 Section 115-100,

Income Tax Assessment Act 1997 Section 116-20,

Income Tax Assessment Act 1997 Section 855-45 and

Income Tax Assessment Act 1997 Section 960-50.

Reasons for decision

Australian residents make a capital gain or capital loss if a CGT event happens to any of their assets anywhere in the world.

CGT event A1 will occur when you sell the property. The timing of the event will determine the income year in which you will be required to include your capital gain or capital loss in your income tax return. CGT event A1 happens when you enter into the contract of sale, or if there is no contract, when a change of ownership occurs. Therefore your share of any capital gain or capital loss that you make on the sale of the property will need to be included in your income tax return in the income year in which you enter into the contract for sale.

You make a capital gain if your capital proceeds are more than your cost base and you make a capital loss if your capital proceeds are less than your reduced cost base.

Your capital proceeds is the amount of money that you receive, or that you are entitled to receive, as a result of the sale.

The cost base of a CGT asset is made up of five elements. You need to add together all of these elements to calculate the cost base. Briefly these are:

Money paid or required to be paid for the property.

Incidental costs of acquiring the property, or costs in relation to the CGT event, for example, stamp duty, legal fees, agents commission etc.

Costs of owning the asset such as rates, land taxes, repairs and insurance premiums. These costs can only be included if the asset was acquired after 20 August 1991.

Capital expenditure you incur to increase or preserve the value of the asset such as renovations that are improvements rather than repairs.

Capital expenditure you incur to preserve or defend your title or right to the asset.

While there are no outright exemptions for taxpayers that were a non resident at the time that they purchased the CGT asset, there are rules that provide a concession to certain CGT assets that you owned just before you became a resident. If the CGT asset is not taxable Australian property, such as land or property overseas, and you acquired the asset after 20 September 1985, you are taken to have acquired the asset for its market value on the day that you become an Australian resident. This will mean that you will be taken to have acquired the property on the day that you became a resident of Australia and the first element of the property's cost base will be its market value on that day.

The valuation should be done on a reasonable basis. A professional valuer or real estate agent who is based in the overseas country should be able to assist with establishing the market value of the property. To calculate the market value on the particular day you will use the exchange rate for that day.

As you are taken to have acquired the property on the day you became a resident of Australia, you have held the property for over 12 months and are therefore entitled to apply the CGT 50% discount to any capital gain that you make on its sale.

For taxation purposes, amounts in foreign currency must be translated in Australian currency. According to section 960-50 of the ITAA 1997, an amount of money received in relation to a CGT event must be translated into Australian currency at the exchange rate applicable at the time of the event.

When a taxpayer receives Australian currency in consideration for a foreign currency, they may have an assessable foreign exchange (forex) realisation gain or a deductible forex realisation loss.

If an individual has a foreign exchange (forex) gain amount, it is included in their assessable income. A forex loss amount, however, is allowed as a deduction.

The forex realisation gain or loss amount is the difference between the foreign currency component of proceeds calculated using the exchange rate at the time of the event converted into Australian dollars and the actual Australian dollars received calculated using the exchange rate at the time of receipt. The two different exchange rates result in two different amounts of proceeds.

The amount is calculated by subtracting the foreign currency component proceeds converted into Australian currency at the time of the event from the actual amount of Australian currency received at settlement. If this amount is positive, there is a forex realisation gain. If the amount is negative, there is a forex realisation loss.

The forex realisation gain or loss is included in the taxpayer's assessable income in the financial year in which the payment was received.