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Ruling

Subject: CGT - deceased estate

Question and Answer

Is the tax payable in country x, by the taxpayer, an allowable credit against the Capital Gains Tax due on the sale of shares, by the Estate of the taxpayer, in Australia?

Yes.

This ruling applies for the following period

1 July 2011 to 30 June 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Post-CGT the taxpayer passed away.

The taxpayer is a resident of Australia for tax purposes.

The taxpayer held a minority shareholding in a land rich overseas private company.

The remaining shareholders, who are residents of country x, have made an offer to purchase the shares from the estate.

Country x tax law operates to tax a non-resident of Country x (the taxpayer) personally by deeming the sale to have occurred right before their death.

Under Australian law, as the shares would become part of the estate, The Estate would be taxed on the sale of the shares.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 6-5(2)

Income Tax Assessment Act 1997 subsection 770-10(1)

Income Tax Assessment Act 1997 subsection 770-15(1)

Income Tax Assessment Act 1997 subsection 770-130(1)

Income Tax Assessment Act 1997 subsection 770-130(2)

International Tax Agreements Act 1953 Schedule 3

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are an Australian resident, your assessable income includes income derived directly or indirectly from all sources, whether in or out of Australia, during the income year, unless that income is exempt income or otherwise not assessable income.

In determining liability to Australian tax on foreign sourced income received by a resident, it is necessary to consider not only the income tax laws but also any applicable double tax agreement contained in the International Tax Agreements Act 1953 (Agreements Act).

Schedule 3 to the Agreements Act contains the Double Tax Agreement (DTA) between Australia and Country x (Country x convention). Schedule 3A to the Agreements Act contains the Protocol amending Country x Convention (Country x Protocol). The Country x Convention and the Country x Protocol operate to avoid the double taxation of income received by Australian and Country x residents.

Article 13 (amended by Article 11 of the Country x Protocol) addresses the alienation of property. Article 13(4) deals with the handling of land rich entities. Under the provision, profits arising from the sale of shares or other interests in land rich companies or other entities, whether the land is held directly or indirectly, also give rise to taxation in the country in which the real property is situated.

Article 23(1) of the Country x Convention (as amended by Article 14 of the Country x Protocol) provides that, subject to the provisions of the law of Australia, a credit for tax paid in Country x under the law of Country x and in accordance with the Country x Convention will be allowed against Australian tax paid on income from Country x sources.

Subsection 770-10(1) of the ITAA 1997 provides that a resident taxpayer is entitled to a foreign income tax offset for foreign income tax that the taxpayer has paid on an amount included in their assessable income.

Subsection 770-15(1) of the ITAA 1997 defines foreign income tax as tax imposed by a law other than an Australian law, and is:

· tax on income; or

· tax on profits or gains, whether of an income or capital nature; or

· any other tax, being a tax that is subject to a treaty having the force of law under the International Tax Agreements Act 1953 (the Agreements Act).

Subsections 770-130(1) and 770-130(2) of the ITAA 1997 provide that a taxpayer is still treated as having paid foreign income tax where the foreign income tax is paid by someone else under an arrangement or under the law relating to the foreign income tax.

You are cover under subsection 770-130(2) of the ITAA 1997 for the payment of CGT, by the taxpayer, in Country x to be credited against the CGT due on the sale of the shares by the Estate of the taxpayer in Australia.