Edited version of your private ruling

Authorisation Number: 1011987442894

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Subject: capital gains tax - shares - ceasing to be an Australian resident - disposal

Question: Can you choose which shares you have disposed of?

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

You acquired a number of shares in an Australian company after 20 September 1985 while you were a resident of Australia.

You acquired additional shares in the same company over a number of years.

You left Australia and became a resident of an overseas country.

You chose to defer any capital gain occurring when you ceased being an Australian resident.

You acquired additional shares in the same company through the company's dividend reinvestment plan after you ceased being an Australian resident.

You disposed of a number of the shares in your current status as foreign resident of Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 104-160

Income Tax Assessment Act 1997 Section 104-165

Income Tax Assessment Act 1997 Section 136-10

Income Tax Assessment Act 1997 Section 136-25

Income Tax Assessment Act 1997 Section 855-10

Income Tax Assessment Act 1997 Section 855-15

Reasons for decision

Capital gains tax

Ceasing to be an Australian resident

A capital gain or loss can only arise if a capital gains tax (CGT) event happens to a CGT asset. The most common CGT event is CGT event A1, which occurs when you dispose of your asset to another entity.

CGT event I1 occurs when an individual ceases to be an Australian resident.  You are taken to have disposed of each of your assets that do not have the necessary connection with Australia for their market value at the time you ceased being a resident.

Calculations of capital gains or losses must be done for each CGT asset just before the CGT event happens, except ones having the necessary connections with Australia. 

A share in a company has the necessary connection with Australia if:

· the company is an Australian resident public company for the income year in which the CGT event happens; and

· the taxpayer and associates beneficially owned at least 10% by value of the shares of the company at any time during the five years before the CGT event happens.

However, any individual ceasing to be a resident of Australia may choose to disregard making a capital gain or loss on assets caught by CGT event I1.  The choice must be exercised for all assets caught by CGT event I1. 

If you make this choice, each of your assets are taken to have the necessary connection with Australia until such time as a CGT event happens to the asset, such as their disposal, or you again become an Australian resident, whichever happens first.

The effect of making this choice is that the increase or decrease in value of the assets from the time you cease being a resident to the time of the next CGT event, or of you again becoming an Australian resident, is also taken into account in working out your capital gains or capital losses on those assets.

Shares acquired while non-resident and disposed of while a non-resident 

A capital gain or capital loss can be made by a non-resident if the CGT asset has the necessary connection with Australia.  

Application to your case

You ceased being an Australian resident and made the choice to disregard the capital gain made on your shares as a result of CGT event I1 occurring.

The shares you owned when you ceased being an Australian resident did not have the necessary connection with Australia as you would not have held more than 10% of the total value of the shares in the company. However, as you chose to disregard the capital gain when you ceased being an Australian resident, the shares are deemed to have the necessary connection with Australia. This will continue until a CGT event occurs in relation to those shares.

You disposed of a number of shares while you were a foreign resident, and CGT event A1 occurred. Therefore, you may be subject to CGT if any of these shares were shares you acquired prior to ceasing to be an Australian resident.

However, if the shares were shares that you had acquired while you were a foreign resident, any capital gain or capital loss made on their disposal can be disregarded as they are not viewed as having the necessary connection with Australia.

Identifying individual shares within a holding of identical shares

In situations where the disposal of shares which form part of a holding of identical shares acquired over a period of time occurs, it may not always be possible for a taxpayer to distinguish or identify the particular shares that have been disposed of.

Taxation Determination TD33 (TD33) sets out the Commissioner's view on how to identify individual shares within a holding of identical shares.

There are two methods that can be used to select which parcel of shares you have sold. The 'first in, first out' method, or you can decide which parcel of shares or part thereof, you have sold.

The "first in, first out" method means that you dispose of the shares in the order in which you acquire them. That is, the oldest shares are sold before the newer shares.

For CGT purposes, the Commissioner will also accept your choice of which shares are sold, provided that you keep adequate records of the transaction so that your decision can be supported.

This means that you can choose any of your shares as long as you note which ones you sold and they are identifiable. This is important because the same shares cannot be used for future sales.

Average cost is not an acceptable method to work out the acquisition cost of shares unless the shares were in the same company, acquired on the same day and they confer identical rights and impose identical obligations.

Methods for calculating capital gains

If a taxpayer has owned an asset for at least 12 months, and the asset was acquired prior to 21 September 1999 and disposed of after that date, they have a choice of two different methods of calculating their net capital gain. These methods are the Indexation method or the CGT discount method

Indexation

If an asset is acquired pre 11.45 am on 21^st September 1999 you are able to index the cost base to take into account any inflationary changes.

If the CGT event happens after 11.45 a.m. on 21 September 1999 in relation to an asset acquired before that time, you may choose to claim indexation of the cost base in calculating the capital gain or the CGT discount. Indexation is frozen as at 30^th September 1999

If the CGT event happens after 11.45 am on 21^st September 1999:

Indexation = CPI figure for quarter ending 30/09/1999_________________

Factor CPI figure for quarter in which expenditure was incurred

Discount method

If you dispose of an asset after 11.45 am on 21^st September 1999 and hold that asset for 12 months you have the choice of using the discount method. If you purchase the asset after 21^st September 1999 you can only use the discount method.
You are eligible to use the CGT discount method if:

• You are an individual;

• A CGT event happens in relation to an asset that you own;

• The CGT event happens after 11.45 am on 21^st September 1999;

• You have owned the CGT asset for at least 12 months;

• You did not choose to apply indexation to the elements of the cost base; and

• You make a capital gain (losses cannot be discounted).

Lodging an Australian income tax return

As a foreign resident of Australia, you only need to lodge an income tax return in Australia if you have received amounts that are subject to income tax (including CGT) in Australia or that are subject to withholding tax where this has not been withheld.

Foreign residents of Australia are not required to pay the Medicare levy, so you can claim the number of days that you are not an Australian resident during a tax year in your return as exempt days.

There is no need to disclose in your tax return any foreign source income you receive after you ceased to be an Australian resident. Also, all Australian-sourced interest, dividends and royalties derived after you ceased to be an Australian resident are subject to the withholding tax provisions as a final tax and should not be included in your tax return.

If you are a foreign resident for the full year, the following rates apply for the 2011-12 income year and apply from 1 July 2011:

If you will be overseas during the lodgment period, but are required to lodge an income tax return, you should make one of the following lodgment arrangements:

· lodge online using e-tax located on the Australian Taxation Office website, www.ato.gov.au

· send your tax return to us by post from overseas to

Australian Taxation Office
GPO Box 9845
SYDNEY  NSW 2001
AUSTRALIA

· have an Australian tax agent lodge your tax return; or

· have a friend or family member lodge a tax return on your behalf. You need to complete a power of attorney if the friend or family member signs the tax return on your behalf.