Edited version of private ruling

Authorisation Number: 1011870979666

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Subject: Capital gains tax - becoming an Australian resident - disposal of foreign property - capital loss

Question: Will you be able to offset the capital loss made on the disposal of your overseas property against any capital gain made in the 2010-11 income year?

Answer: Yes

This ruling applies for the following period:

Income year ended 30 June 2011

The scheme commenced on:

1 July 2010

Relevant facts and circumstances

While you were a foreign resident, you and your spouse jointly purchased a property located overseas after 20 September 1985.

You and your spouse decided to move permanently to Australia and applied for permanent residence visas, which were granted.

You decided to renovate your overseas property with the view of realising as much capital on the disposal of the property to bring to Australia.

Renovation work on the overseas property was completed prior to you moving to Australia.

Your spouse and family moved to Australia, while you remained overseas in order to complete the renovations and to put the property on the market.

The property was put on the market and you moved to Australia as a migrant after a short period of time.

You are in the process of applying for Citizenship.

A buyer was found for the overseas property, with the purchase price subject to the sale of the buyer's own property.

The property market in the country where your property was located fell, causing the buyer difficultly in selling their own property. They requested that you reduce the sale price of your property, and the sale price was subsequently reduced, but the sale fell through.

The overseas property was rented out for an extended period of time. It was put back on the market while it was being rented out at a new sale price.

You received a number of offers at a lower sale price from cash buyers and accepted an offer from one of the parties.

The sale contracts were signed and settlement occurred in the 2010-11 income year.

You made a capital loss on the disposal of your overseas property.

You wish to treat the overseas property as an investment property from the date of your arrival in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 102-10
Income Tax Assessment Act 1997 Section 102-15
Income Tax Assessment Act 1997 Section 102-20
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 118-185
Income Tax Assessment Act 1997 Section 855-45

Reasons for decision

There are special capital gains tax (CGT) rules that apply if you become an Australian resident for taxation purposes.

If an individual becomes an Australian resident for CGT purposes, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident. However, the rules do not apply to pre-CGT assets or assets that are taxable Australian property, such as property located in Australia.

Under the special acquisition rule, if you became an Australian resident on or after 12 December 2006, you are taken to have acquired assets that were not taxable Australian property, such as an overseas property, at the time you became an Australian resident.

The special cost base rule provides that the first element of the cost base and reduced cost base of an asset is its market value at the time the taxpayer becomes a resident.

A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as the disposal of a property.

You make a capital loss when the capital proceeds received for the disposal of your capital asset are less than the reduced cost base of the asset.

Capital losses are applied to capital gains made in the same income year. If your capital losses exceed your capital gains for the income year, you will have a net capital loss. Net capital losses are applied against future capital gains to the extent that they have not already been. Where you have not been able to apply a net capital loss against a capital gain, that part of the loss is able to be carried forward to a later income year.

Application of the law to your facts

In your case, you and your spouse jointly owned an overseas property. You moved to Australia and the property was disposed of a number of years later. You made a capital loss on the disposal of your overseas property.

For CGT purposes, you are taken to have acquired your overseas property on the date you became an Australian resident.

The reduced cost base of the overseas property is the sum of the following elements:

· The first element of the reduced cost base is your share of the market value of the overseas property in accordance with your ownership interest in the property, calculated as at the date you became a resident of Australia;

· The second element of the reduced cost base includes selling costs and the cost of any valuation that you need to do for capital gains purposes;

· The third element is not included in the reduced cost base of a CGT asset;

· The fourth element of the reduced cost base is the cost of any capital improvements that you have made to the property since you became a resident of Australia, and

· The fifth element of the reduced cost base is any capital expenses you incurred to preserve or defend your ownership of or your rights to the property after you became a resident of Australia.

As the overseas property was your main residence for part of your ownership period, a partial main residence exemption will apply. You will need to apportion the capital loss made on the disposal of your overseas property using the following formula:

Capital loss X __Non-main residence days__

Days in your ownership period

Note: Your ownership period is based on actual ownership of the UK property.

The capital loss you have made on the disposal of your overseas property can be used to offset any capital gain made in the 2010-11 income year. If you are not able to apply all of the capital loss against any capital gain in the 2010-11 income year, the unapplied capital losses can be carried forward and offset against future capital gains.