Edited version of private ruling

Authorisation Number: 1011770391260

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Ruling

Subject: Residency

1. Are you deemed to have acquired the property for Australian capital gains tax (CGT) purposes at the time you first became an Australian resident for tax purpsoes?

Yes.

2. Is the first element of the cost base and reduced cost base its market value at that time.

Yes.

3. Did a CGT event occur on a date when you later ceased to be an Australian resident?

Yes.

4. Is any gain or loss from that event disregarded?

Yes.

5. Are you deemed to have reacquired the property on a date when you again became an Australian resident?

No.

This ruling applies for the following period

Year ended 30 June 2010

The scheme commenced on

1 July 2009

Relevant facts and circumstances

You have had multiple changes in residency status in recent years.

You acquired a property overseas a number of years ago.

You first became a resident of Australia for tax purposes after you acquired the property.

Your Australian tax residency terminated, when you went to live and work overseas.

You later resumed Australian tax residency.

You elected to defer disregard any capital gain or loss when you ceased being an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Subsection 995-1(1)

Income Tax Assessment Act 1997 Section 102-5

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 104-165(2)

Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

In accordance with section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997), a taxpayer, who is a resident of Australia, is taxable on ordinary and statutory income derived from all sources whether in or out of Australia during the income year. 

However, a non-resident is generally liable for Australian tax only on ordinary and statutory income derived from all Australian sources during the income year.

Section 102-5 of the ITAA 1997 provides that assessable income includes your net capital gains (if any) for the income year.  If you are a non-resident this only applies to any CGT assets having the necessary connection with Australia, as outlined in section 136-10 of the ITAA 1997. A list of the types of assets that have a necessary connection with Australia can be found in section 136-25 of the ITAA 1997. Examples of assets without a necessary connection with Australia are land or a building outside Australia, or a share in a private company that is not an Australian resident company.

If you are a non-resident who becomes a resident of Australia for taxation purposes, you are deemed to have acquired any asset you own that does not have a necessary connection with Australia, on the date you become a resident of Australia (section 136-40 of the ITAA 1997). In these circumstances, the first element of the cost base for such assets will be the market value on the day you become an Australian resident.

Similarly, if you are resident of Australia who becomes a non-resident, you are deemed to have disposed of any assets that do not have a necessary connection with Australia on the day you become a non-resident. This is CGT event I1 as outlined in section 104-160 of the ITAA 1997 and can result in individuals becoming liable for CGT without actually disposing of an asset.

However, you can elect to disregard any such capital gains (under subsection 104-165(2) of the ITAA 1997). If you make this choice, the assets are taken to have the necessary connection with Australia until the earlier of:

· a CGT event happening to the assets (e.g. disposal)

· you again become an Australian Resident

The effect of making this choice is that the change in value of the assets from the time you stop being a resident to the time of the next CGT event or you again become a resident is also taken into account when calculating any capital gain or capital loss.

For example, John lives in Ireland where he owns his own home, as well as a rental property that he bought in August 2000 for (the equivalent of) AUD$250,000. In 2003, John gets offered a job in Australia, so he sells home, but chooses to keep his rental property to provide him with an additional source of income. In June 2003 John has his rental property valued at AUD$280,000 and he completes his move to Australia on 28 June 2003. As John has gone from being a non-resident to being a resident, he is deemed to have acquired any assets without a necessary connection with Australia on the day he became a resident. In this example, John is deemed to have acquired his rental property on 28 June 2003 for $280,000.

John works in Australia for three years, and then decides to move back to Ireland. On 12 September 2006 John completes his move back to Ireland. This results in CGT event I1 occurring, so John again gets his rental property valued and the value has risen to AUD$320,000 meaning he will have made a capital gain of $40,000 in the 2007 income year.

John does not wish to pay this capital gain, so he elects (under subsection 104-165(2) of the ITAA 1997) to disregard this amount, however this means that Johns rental property is taken to have a necessary connection with Australia until he either disposes of the property or again becomes a resident of Australia. Two years later, John decides to sell his rental property. The contract for sale is settled on 16 October 2008 for the equivalent of AUD$350,000. As another CGT event has occurred to the property (CGT event A1, disposal of an asset) John will have to lodge an Australian tax return at the end of the financial year, and report a capital gain of $70,000 ($350,000 - $280,000).

In your case you arrived in Australia as a permanent resident after you had acquired the property

In accordance with section 855-45 you are deemed to of acquired any asset that does not have the necessary connection with Australia on the date you became an Australian resident..

You had signed a contract to purchase the property before you became an Australian resident so the asset you acquired was the actual property - not a right to acquire or any other intangible asset.

You then became a non-resident for taxation purposes.

At this time CGT event I1 occurred and you elected to treat your assets as having a necessary connection with Australia. The assets maintained this connection until you again became an Australian resident. Therefore any gain or loss made at that time was disregarded.

No other CGT event occurred to the property until you again become an Australian resident later.

Section 855-45 did not apply when you became a resident on that occasion as the property had the necessary connection with Australia because of the previous 104-165(2) election. Therefore you are not deemed to have acquired the property when you became a resident again.

No capital gain or loss occurs until a CGT event occurs to the property, for example if you dispose of the property or again cease to be an Australian resident and do not make an election under 104-65(2).

Market value

Taxation Determination TD 10 provides information on how to determine an acceptable valuation for CGT purposes. It states:

Where the market value of an asset needs to be determined, taxpayers can choose to:

· obtain a detailed valuation from a qualified valuer; or

· compute their own valuation based on reasonably objective and supportable data.

Example:

A taxpayer owns a unit in a block of 10 units and needs to obtain its market value for CGT purposes.

The taxpayer chooses not to approach a qualified valuer in this case.

A valuation based on contemporaneous sales of similar units in that block of units would be acceptable.

You will make a capital gain if the market value at the time of the event (change of ownership of the properties) exceeds the cost base of the property.

Please note that the market value of the property is worked out at the time the CGT event happens.

A taxpayer can also ask the Commissioner to determine a value; however the Commissioner may charge a fee to provide a valuation.

Under section 359-40 of Schedule 1 to the Taxation Administration Act 1953 (TAA) the commissioner may determine the valuation of any thing where a taxpayer requests a valuation.

The Commissioner has the power to:

· refer a valuation matter to a valuer if the Commissioner needs to determine a value and

· charge the applicant a fee, in accordance with regulations, for the valuer making or reviewing the valuation.