Edited version of private ruling

Authorisation Number: 1011868377278

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Ruling

Subject: Capital gains tax - ceasing to be an Australian resident

Questions and answers:

1) Are the shares you own liable under the capital gains tax provisions when you left Australia on 31 March 2011?

Yes.

2) Are you entitled to choose which CGT assets this applies to?

No.

3) Does the first element of the cost base of the shares include the original amount you paid to invest in the Portfolios?

Yes.

4) Does the cost base of the shares include any amount given on the date on which the actual share ownership was delivered to you?

Yes.

5) Are dividends paid to you from an Australian company as an overseas shareholder, on which non-resident withholding tax has been correctly withheld, subject to Australian taxation?

No.

6) Are franked dividends paid to you from an Australian company as an overseas shareholder subject to Australian taxation?

No.

7) While you are a non-resident, are you able to disregard any capital gain or capital loss that may arise on the disposal of your Australian shares that are not taxable Australian property?

Yes.

8) As a non-resident are you eligible to avail yourself of the roll-over provisions provided under the demerger?

No.

This ruling applies for the following period:

Year ended 30 June 2011
The scheme commenced on:

1 July 2010

Relevant facts and circumstances

You became a non-resident of Australia in the 20XX-XX income year.

Before leaving Australia you invested in capital protected warrants with underlying shares and on submitting a completion notice you received ownership of these shares.

All shares acquired under the capital protected warranty scheme are Australian shares.

None of your shares were acquired prior to 20 September 1985

As a consequence of a demerger you received shares in an Australian company as an overseas shareholder.

You also acquired other Australian shares after 20 September 1985.

You are not making an election to defer your capital gains tax liability on ceasing to be an Australian resident.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6(1)

Income Tax Assessment Act 1936 Section 128B(1)

Income Tax Assessment Act 1936 Section 128B(2)

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Reasons for decision

Please note that all references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Capital gains tax

Section 100-10 explains that capital gains tax (CGT) is the income tax you pay on any net capital gain you make as a result of a CGT event taking place. This capital gain is included in your annual income and you are taxed at your marginal tax rate.

CGT events are the different types of transactions that may result in a capital gain or capital loss.

Capital gains tax (CGT) event I1:

Individual or company stops being an Australian resident

CGT event I1 happens if an individual or a company stops being an Australian resident. The effect of the event is that subject to certain exceptions CGT will apply to all of the CGT assets of the individual or the company. The time of the event is when the individual or the company stops being a resident.

The exceptions are contained in section 104-160(3) which states that CGT event I1 does not apply to "taxable Australian property", defined in section 855-15 as:

1. "taxable Australian real property" which, in turn, is defined as real property situated in Australia, or a mining, quarrying or prospecting right if the subject minerals, petroleum or quarry materials are situated in Australia;

2. an "indirect Australian real property interest" which is essentially a 10% or more interest in a company or trust where more than 50% of the market value of the assets of the company or trust are directly or indirectly attributable to Australian real property;

3. a CGT asset that has been used at any time in carrying on a business through a permanent establishment in Australia;

4. an option or right to acquire any of the above categories of "taxable Australian property";

5. a CGT asset that is covered by an election made under CGT event I1 (that is, an election to defer CGT liability on CGT assets on ceasing to be an Australian resident and to treat them as "taxable Australian property" ).

The fifth category of "taxable Australian property" is an asset subject to an election or choice under CGT event I1. This choice allows an individual taxpayer to defer the CGT liability that otherwise would arise on assets that are not taxable Australian property on the individual ceasing to be a resident.

The effect of the choice is that the assets will be treated as taxable Australian property until such time as the assets are subject to a later CGT event or you again become a resident. In this way you can defer the CGT liability on those assets that otherwise would arise on becoming a non-resident.

The choice is available only to individual taxpayers (not companies) and must be made in respect of all their CGT assets.

If you do not make the choice to defer, the time of CGT event I1 is when you stop being a resident. Crucially, as pointed out above, CGT event I1 will happen in respect of all your CGT assets that are not taxable Australian property.

Where CGT event I1 occurs you are required you to calculate the capital gain or capital loss for each CGT asset you owned just before the CGT event.

Generally a capital gain arises under CGT event I1 if the market value of the CGT asset at the time of the event is greater than its cost base. Alternatively, a capital loss arises if the market value at the time of the event is less than the reduced cost base.

This capital gain or capital loss is calculated in Australian dollars using the exchange rate applicable at the time of the CGT event. Also the CGT general discount is available if the asset has been held for more than 12 months.

You wish to avail yourself of the provision deeming the occurrence of the CGT event I1 when you ceased to be a resident of Australia. Therefore you will need to determine whether or not you made a capital gain or a capital loss for each CGT asset you owned just before you departed Australia.

Determining the cost base of an asset

The cost base of a share is made up of five elements:

1. Money or property given for the share.

2. Incidental costs of acquiring the share or that relate to the CGT event. These include such things as broker or agent fees and stamp duty.

3. Costs of owning the share such as interest on monies borrowed, however, this will not apply to shares because these expenses are usually claimed as tax deductions each year.

4. Capital costs to increase or preserve the value of the share.

5. Capital costs of preserving or defending your ownership of or rights to your share.

The first element of your cost base for the shares acquired from the capital protected portfolios is the amount you paid to acquire them plus any amount you had to pay on submitting the completion notice and receiving ownership of the underlying shares.

Similarly, the first element of your cost base for the other Australian shares will be the amount it cost to acquire them.

Dividends paid by an Australian company to a non-resident

Non-residents are liable to Australian income tax on all income derived from Australian sources, under subsection 6-5(3). A non-resident shareholder in a company is assessable on a dividend to the extent that it is paid out of profits derived by the company from sources in Australia.

Taxation Ruling IT 2680 explains that non-residents of Australia for income tax purposes are subject to withholding tax on the dividend and interest income they derive from an Australian source. Withholding tax, which is deducted at the time a payment is made to a non-resident, represents the non-resident's final liability to Australian income tax. Where a non-resident has interest or unfranked dividend income that has not had non-resident withholding tax deducted from it, they must include this income in an Australian income tax return.

As the withholding tax on unfranked dividends is a final tax a foreign resident taxpayer would have no further Australian tax liability on those unfranked dividends.

ATO ID 2002/35 looks at the assessabilIty of Australian sourced franked dividends, unfranked dividends and interest received by a non-resident taxpayer. It explains that franked dividends paid to non-residents are excluded from the withholding tax provisions under paragraphs 128B(3)(ga) and (gaa) of the Income Tax Assessment Act 1936 (ITAA 1936). No tax is withheld as the company has already paid tax on behalf of the taxpayer. These dividends and franking credits are not included in assessable income and therefore do not form part of an Australian income tax return, if there is a requirement to lodge one.

You are a non-resident with shareholdings in Australian companies. You will not need to lodge an Australian income tax return if the only Australian-source income you earn is interest, dividends or royalties on which non-resident withholding tax has been correctly withheld or for which the tax has already been paid on your behalf. Such income does not need to be included in an Australian income tax return.

To ensure that non-resident withholding tax is correctly withheld you need to advise your Australian payers of your current overseas address. In addition, it will ensure that the distribution statements from the payers are automatically modified so they advise you of the amounts of the distribution which are not assessable income for non-residents.

Certificates of payment

If you need proof of payment of withholding tax to comply with the tax requirements of your own country, you can ask your payer to request a certificate of payment from us.

Disposal of your Australian shares as a non-resident
As a non-resident you may make a capital gain or capital loss only on the disposal of taxable Australian property. Taxable Australian property was defined earlier in this document.

You acquired some of your shares as a result of a demerger after you had ceased being an Australian resident. Therefore as long you do not hold a 10% or more interest in the company where more than 50% of the market value of the assets of the company are directly or indirectly attributable to Australian real property, you will be able to disregard any capital gain or capital loss made when you dispose of them.

Rollover provisions contained in Class Ruling

The ruling explains the class of entities to which it applies who were residents of Australia as defined in subsection 6(1) of the ITAA 1936 on the Implementation Date of the scheme.

As you have been a non-resident since leaving Australia, you were not an Australian resident as defined in subsection 6(1) of the ITAA 1936 and the ruling does not apply to you.