Edited version of your private ruling

Authorisation Number: 1012442405734

Ruling

Subject: Residency status, Employee share scheme, Capital gains tax, TOFA, FOREX

Questions and Answers:

1. Will you be regarded as an Australian resident from the day your family arrived in Australia to live?

Yes

2. Will you be an attributable taxpayer pursuant to section 102AAT of the Income tax Assessment Act 1936 (ITAA 1936) in relation to the trust?

No

3. If you become presently entitled (for the purposes of section 97 of the ITAA 1936) to any current year income of the trust on or after 1 July 2012, will you be assessable on a proportionate share of the net income of the Trust pursuant to section 97 of the ITAA 1936?

Yes

4. If the trust makes a distribution to you on or after 1 July 2012, out of income or accrued capital gains of the trust (other than current year income), will you be assessable on any of that amount pursuant to section 99B of the ITAA 1936 and will you be liable to pay interest pursuant to section 102AAM of the ITAA 1936?

Yes

5. Will any amount be assessable to you in respect of the shares under Division 83A of the Income Tax Assessment Act 1997 (ITAA 1997) or any predecessor provision?

No

6. Is the relevant CGT event with respect to the disposal of the shares CGT event A1 in section 104-10 of the ITAA 1997?

Yes

7. If CGT event A1 is the relevant event, does the cessation of your employment or the giving of a 'Value Notice' result in the entering into of a contract for the purposes of section 104-10(3) of the ITAA 1997 so that any subsequent giving of a Call Option or a Put Option does not alter the fact that the relevant CGT event occurred at an earlier point in time when you were a foreign resident?

No

8. If the answer to the question above (question 7) is that CGT event A1 does not occur until a Call or Put Option is exercised:

(a) Will the capital proceeds be the dollar equivalent of the amount payable as determined by reference to the Value Notice at the date the Call Option/Put Option is exercised?

Yes

(b) Is the first element of the cost base of the shares still held by you when you became an Australian resident, the market value of those shares even if the market value differs from the sale price set by the Value Notice?

Yes

(c) Will you be entitled to the CGT discount under Division 115 of the ITAA 1997 only in respect of shares that are disposed of at least 12 months after you became an Australian resident?

Yes

(d) Are any foreign exchange gains or losses dealt with in accordance with sections 775-70 and section 775-75 of the ITAA 1997 and sections 104-260 and 104-265 of the ITAA 1997?

Yes

9. Is the right to receive a payment from the disposition of the shares a personal use asset under section 108-20 of the ITAA 1997?

No

10. Is there a financial arrangement for the purpose of Division 230 of the ITAA 1997?

No

11. If there is a financial arrangement for the purposes of Division 230 of the ITAA 1997, does section 230-455 of the ITAA 1997 apply so that Division 230 of the ITAA 1997 is taken not to apply to the gains and losses from the financial arrangement?

Not applicable

This ruling applies for the following periods:

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

The scheme commences on:

1 July 2012

Relevant facts and circumstances

You were born in the Country A and lived there until you moved to Country B.

You are a citizen of Country A

Your spouse was born in Australia and holds an Australian passport.

You and your spouse were married.

You and your spouse have children aged below 15 years. The children were born in Country and hold Australian passports.

You and your family lived in Country B for several years.

You visited Australia a number of times since you and your spouse were married to visit friends and relatives.

You and your spouse own a few properties in Australia. The only assets owned by you and your spouse in Country B are in the form of bonds, equities and cash.

On date X your spouse and children moved to Australia permanently and moved into one of your properties in Australia which you jointly own with your spouse. You planned to move to Australia permanently with your family however, you were unable to do so due to visa issues.

Your intention is to move to Australia as soon as you are granted a visa by the Australian Immigration Department.

You visited Australia to settle your family and stayed for several weeks. Since then you have returned to Australia twice to visit your family and have stayed for many weeks.

You recently purchased a residential home for your family in Australia. You made an investment in Australia. Some of your small personal effects and family furniture have been shipped to Australia for use by your family.

Your children have been attending school in Australia since arrival in Australia.

Whilst living in Country B, you and your family leased a property. After your family moved to Australia, you lived with friends in Country B. You spent several months travelling on a short term basis typically staying in hotel/serviced apartment accommodation. You did not keep a property under lease in Country B during that time.

You intend to continue travelling extensively until you move to Australia.

You plan to visit your spouse and children quite a few times prior to moving to Australia. You will also visit your rental properties.

You have retained extensive social ties in Country B, including a wide network of friends, colleagues and business associates. You are an active member of various clubs there.

Until you move to Australia, you intend to pursue employment and investment opportunities in Country B and expect to finalise a new long term lease in Country B.

Employment in Country B

Whilst living in Country B you were employed by Company M but ceased to be employed during the 2011-12 income year.

As an employee, you were allowed to acquire shares in Entity N which is related to Company M. You were obliged to enter into a Put and Call Option Agreement (the Agreement).

Entity N is a resident of Country C.

Country C is not listed in the listed countries under Schedule 10 to the Income Tax Regulations.

Employee trust (the trust)

In addition to owning shares in Entity N, you are a discretionary beneficiary of an employee trust (the trust). The trustee of the trust is Company O.

The trust is governed by a deed (the Trust Deed), the key points being:

· The trust was established for the benefit of the employees, former employees and relatives of the employees and former employees of Company M.

· The trust is entirely discretionary.

· Any rights on termination can be excluded by Company O.

By being a former employee, you are within the class of beneficiaries who, at the discretion of the trustee, may receive a distribution from the Trust.

The trust has been established as a mechanism for providing deferred compensation as an incentive to employees.

Distributions from the trust are to be made to you as regular incentive payments or bonuses over several years.

You have stated that the distributions will be bonuses and constitute remuneration related to your previous employment in Country B.

Apart from the regular distributions form the Trust in the form of incentive payments, you may also receive distributions made out of income or accrued capital gains.

You have stated you will not transfer any property or services to the trust estate (for the purposes of sub-subparagraph 102AAT(1)(a)(i)(C) of the ITAA 1936) following the termination of your employment with Company M.

Employee Share Scheme

Under the Employee share scheme (the Scheme), Company O, as trustee of the trust holds shares in Entity N.

The key elements of the Scheme are:

· Shares are held by the employee and by Company O (trustee).

· All shares, Class A, B, C and D are preference shares.

· A and C class preference shares are held by Company O, and B and D class preference shares are held by the employees.

· Distributions from the trust are made in accordance with the Trust Deed.

Although you and your family members are included as beneficiaries of the trust, you or any family member have not contributed any property or services to the trust.

As you have terminated your employment, you are obliged to sell the shares you have acquired.

The sale of the shares is governed by the Agreement. The Agreement is between you and Company P, a company incorporated and resident in Country C.

You entered into a novation notice with Company P, the ultimate holding company, as a consequence of which Company P was replaced by Company Q as the party to the Agreement.

You have no interest in Company P or Company Q.

The Agreement provides for the rules for dealing with the shares following a decision by an employee to terminate employment. In your case, the disposal agreement requires Company Q to acquire the Entity N shares held by you in tranches over a certain period following the termination of employment.

The key clauses of the Agreement are;

· Shares are defined as the shares in Entity N owned by you.

· Cessation date is defined as the earlier of:

i. The date on which you cease to be an employee or director of Company M; and

ii. The date on which you give or are given notice to leave your employment or otherwise resign from your employment.

All the shares held by you are 'vested shares' as defined in the Agreement.

The steps involved in the disposal of the Entity N shares are:

1. The service of a 'value notice' by Company Q which serves to six the price at which shares then sold by you. A value notice is served at the start of each calendar year.

2. The annual service of a 'call option notice' by Company Q, or failing that, a 'put option notice' by you.

3. The entering into of a share purchase agreement.

The payment requirement by Company Q for the shares is a fixed price plus a possible additional amount from the trustee (Company O) as defined in the Agreement.

You have stated that it is understood that the additional amount will be taxable in Country B on receipt by you.

You will receive no dividends from Entity N.

Other facts

You have stated that Division 230 of the ITAA 1997 will not apply to you as one of the exceptions under subdivision 230-H of the ITAA 1997 will apply. In particular, you state the exception under section 230-455 of the ITAA 1997 will apply to your financial arrangement as:

· you are an individual

· the arrangement is not a qualifying security

· the arrangement will end within 12 months.

Relevant legislative provisions

Income Tax Assessment Act 1936 Subsection 6(1).

Income Tax Assessment Act 1936 Section 99B.

Income Tax Assessment Act 1936 Section 102AAM.

Income Tax Assessment Act 1936 Section 102AAT.

Income Tax Assessment Act 1936 Section 221A

Income Tax Assessment Act 1997 Section 6-5.

Income Tax Assessment Act 1997 Division 83A.

Income Tax Assessment Act 1997 Section 84-5.

Income Tax Assessment Act 1997 Section 108-20.

Income Tax Assessment Act 1997 Section 116-20.

Income Tax Assessment Act 1997 Section 230-15

Income Tax Assessment Act 1997 Section 230-455.

Income Tax Assessment Act 1997 Section 855-45.

Income Tax Assessment Act 1997 Section 995-1.

Reasons for decision

1. Residency

Subsection 995-1(1) of the Income Tax Assessment Act 1997 (ITAA 1997) defines an Australian resident as a person who is a resident of Australia for the purpose of the Income Tax Assessment Act 1936 (ITAA 1936).

The terms resident and resident of Australia, in regard to an individual, are defined in subsection 6(1) of the ITAA 1936. The definition provides four tests to ascertain whether a taxpayer is a resident of Australia for income tax purposes. These tests are:

1. The resides test

2. The domicile test

3. The 183 day test

4. The superannuation test

The primary test for deciding the residency status of an individual is whether the individual resides in Australia according to the ordinary meaning of the word resides. However, where an individual does not reside in Australia according to ordinary concepts, they may still be considered to be an Australian resident for tax purposes if they satisfy the conditions of one of the three other tests.

The resides test

The ordinary meaning of the word reside, according to the dictionary meaning, is to dwell permanently, or for a considerable time, to have one's settled or usual abode, to live in or at a particular place.

Taxation Ruling TR 98/17 specifies that the period of physical presence in Australia and an individual's behaviour while present in Australia are important factors for the purpose of the resides test and may reflect a degree of continuity, routine, or habit that is consistent with residing here.

Whether a considerable time has elapsed to demonstrate that an individual's behaviour has the required continuity, routine or habit is a question of fact and the Commissioner's view of the law is that six months is a considerable time when deciding whether an individual's behaviour is consistent with residing in Australia.

When behaviour consistent with residing here is demonstrated over a considerable time, an individual is regarded as a resident for taxation purposes from the time the behaviour commences. In considering an individual's behaviour while in Australia, the Commissioner considers a number of factors, including:

1.                  intention or purpose of presence;

2.                  family and business/employment ties;

3.                  maintenance and location of assets;

4.                  social and living arrangements.

There have been several court cases where residence according to ordinary concepts has been examined in detail. Overall, residence includes two elements: physical presence in a particular place and the intention to treat the place as home, at least for the time being, not necessarily forever.

In a recent case Iyengar and Commissioner of Taxation AATA 856 (30 November 2011) (Iyengar's Case) the AAT found the individual was a resident of Australia under the resides test because of his continuity of association with Australia by maintaining his jointly owned home in Australia and the fact that his spouse remained in that home in Australia.

In reaching its conclusion the Tribunal considered the following factors:

Physical presence

· his family remained in Australia;

· he transferred his employment income to Australia to pay his mortgage;

· he returned to his home in Australia during holidays;

· he retained most of his personal items in Australia;

· his temporary and fixed employment contract (2 years); and

· he did not purchase any substantial items of personal property whilst overseas.

Nationality

Ordinarily, the nationality of an individual does not weigh significantly in deciding the residency status of an individual. However, in borderline cases, this factor may play a role.

In Iyengar's case the taxpayer and his family became Australian citizens in June 2003.

Maintenance of a place of abode

In Iyengar's Case the taxpayer maintained a place of abode in Australia, being his family home, whilst he was employed overseas. The taxpayer also left behind in Australia some of his personal items, such as two motor vehicles, furniture and appliances, clothing and other household items. These factors were found to be indicative of him remaining an Australian resident.

Family and business ties with a country

Case law has established that the family or business ties that an individual retains with a country are relevant in determining whether an individual has remained or ceased to be a resident.

In Iyengar's Case the following ties that the taxpayer had with Australia were such that he remained a resident of Australia:

· his family remaining in Australia (except for the short trip to Dubai by his wife);

· he maintained his family home in Australia;

· he used all his foreign income to make additional payments on his mortgage; and

· his holidays in Australia were at his family home.

Application to your circumstances

Your circumstances are similar to the facts of Iyengar's Case. You are considered to be an Australian resident for tax purposes from date X as:

· Prior to your spouse and children moving to Australia on date X, you visited Australia a number of times since you and your spouse were married to visit friends and relatives.

· It was your intention to move to Australia with your family on date X; you could not do this due to visa issues.

· Your intention is to move to Australia as soon as you are granted a visa by the Australian Immigration Department. You anticipate moving to Australia on a permanent basis during the first half of the 2013-14 income year.

· You visited Australia to settle your family and stayed for several weeks. Since then you have returned to Australia twice to visit your family and have stayed for many weeks.

· You recently purchased a residential home for your family in Australia. You made an investment in Australia. Some of your small personal effects and family furniture have been shipped to Australia for use by your family.

· You will visit your family quite a few times in Australia until you move here for periods.

· Your children are going to school in Australia.

· You have been travelling overseas since your spouse and children moved to Australia and you plan to travel extensively until you are able to move to Australia.

· You and your spouse own a few properties in Australia. The only assets owned by you and your spouse are in the form of bonds, equities and cash.

· Your spouse is an Australian citizen.

· Your spouse and children hold Australian passports.

We have noted that until you move to Australia, you intend to pursue employment and investment opportunities in Country B. You plan to engage in full time employment in Country B and expect to finalise a new long term lease in Country B. You have retained extensive social ties in Country B, including membership with clubs.

However, your spouse and children live in Australia. Your intention is to move to Australia permanently. You have visited your family frequently and for substantial periods since date X. You will continue to visit your family until you move here. You recently purchased a family home for your family in Australia. You own assets in Australia and your children go to school here. Based on these facts, you will be an Australian resident for taxation purposes from date X under the resides test as your behaviour in Australia reflects a degree of continuity, routine or habit that is consistent with residing here.

2. Attributable taxpayer

The transferor trust rules only operate to attribute income to an Australian resident entity where that entity meets all the requirements relating to the applicable provisions of section 102AAT of the ITAA 1936.

When the trust is a discretionary trust, then all the relevant conditions in subparagraph 102AAT(1)(a)(i) of the ITAA 1936 must be satisfied.

An attributable taxpayer in relation to a discretionary trust is defined in section 102AAT of the ITAA 1936 to mean an entity that has transferred property or services to the discretionary trust being a non-resident trust, before or during the entity's current year of income, provided that the trust was a discretionary trust at any time during the year.

Sub-subparagraph 102AAT(1)(a)(i)(E) of the ITAA 1936 provides as follows:

If the underlying transfer was made under an arm's length transaction otherwise than in the course of carrying on a business - the entity was in a position at any time after the transfer time and before the end of the entity's current year of income, to control the trust estate;

Further, paragraph 6 of TR 2007/13 says the transfer of services do not lead to the application of the transferor trust provisions where they made other than in the course of carrying on a business to a discretionary trust, but are arms' length transactions and the transferor is not in a position to control the trust estate, which is the position in your case.

Accordingly, you will not be an attributable taxpayer pursuant to section 102AAT of the ITAA 1936.

3. Distributions from the trust - Incentive payments

Subsection 6-5 of the ITAA 1997 provides that the assessable income of a taxpayer includes income according to ordinary concepts (ordinary income).

Ordinary income has generally been held to include three categories, namely, income from rendering personal services, income from property and income from carrying on a business. Other characteristics of income that have evolved from case law include receipts that:

· are earned;

· are expected;

· are relied upon; and

· have an element of periodicity, recurrence or regularity.

Incentive payments or bonuses come within the meaning of ordinary income. An inducement or incentive payment is an additional reward payment derived by a taxpayer.

You benefit from the trust as a direct consequence of being a former employee of Company M. You are receiving regular distributions from the trust which are being paid as incentive payments as a result of your previous employment.

The incentive payments you receive constitute ordinary income.

You have argued that the incentive payment distributions from the trust are salary and wage income and should be regarded as either non-assessable or exempt income. We shall now consider the assessability of the incentive payments by examining the source of the payments and when they are derived. We shall then apply the Double tax agreement.

Source of incentive payments

You were an employee of Company M which is a resident of Country C. Thus the source of your incentive payments is Country C.

When are the incentive payments derived?

Paragraph 4 of Taxation Ruling IT 2534 rules that a bonus is taken to have been derived for income tax purposes at the time it is paid or otherwise made available to the employee. This is so, even where the bonus may have been with regard to duties performed in a previous year of income. This principle would also apply to incentive payments.

Therefore, for taxation purposes you are considered to have derived your incentive payments at the time of receipt, even though they relate to duties performed in previous income years.

Assessable income

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the ITAA 1936 and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. As your employer was a resident of Country C, we need to consider the Country C Agreement which is listed in section 5 of the Agreements Act.

The Country C Agreement is located on the Austlii website (www.austlii.edu.au) in the Australian Treaties Series database. It operates to avoid the double taxation of income received by residents of Australia and Country C.

An Article of the Country C Agreement deals with dependent personal services income. It states that salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable only in Australia unless the employment is exercised in Country C. If the employment is so exercised, such remuneration as is derived from that exercise may be taxed in Country C.

In your case you were an employee of Company M. You are a resident of Australia for tax purposes as of date X. Since that date you have received and will continue to receive your regular incentive payments. These payments are paid as a result of you being an employee rather than as a result of service being exercised as there was no and, there will be, no actual service exercised. Consequently, this incentive payment income is taxable in Australia and included in your assessable income under subsection 6-5(2) of the ITAA 1997.

4. Distribution from trust and sections 99B and 102AAM of the ITAA 1936

Subsection 99B(1) of the ITAA 1936 provides that where, during a year of income, a beneficiary who was a resident at any time during the year is paid a distribution from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary.

Subsection 99B(2) of the ITAA 1936 modifies the rule in subsection 99B(1) of the ITAA 1936 and has the effect that the amount to be included in assessable income under subsection (1) is not to include any amount that represents:

· corpus of the trust, but an amount will not be taken to represent corpus to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer; or

· amounts that would not be included in assessable income of a resident taxpayer if they had been derived by that taxpayer; or

· amounts that have been or will be included in the assessable income of the beneficiary under section 97 of the ITAA 1936 or have been liable to tax in the hands of the trustee under sections 98, 99 or 99A of the ITAA 1936.

If the trustee makes a distribution to you, out of income or accrued capital gains of the trust, you will be assessable on any of that amount under section 99B of the ITAA 1936 if the exclusions listed above are not met.

Interest under section 102AAM of the ITAA 1936

Section 102AAM of the ITAA 1936 imposes additional tax (the interest charge) where an amount is to be included in the taxpayer's assessable income in terms of section 99B of the ITAA 1936. However, if part of the distribution was paid out of income which has been taxed in a listed country, that part will not be subject to the interest charge (subparagraph 102AAM(1)(b)(ii) of the ITAA 1936).

The listed countries comprise seven countries (Schedule 10 to the Income Tax Regulations 1936). These are Canada, France, Germany, Japan, New Zealand, United Kingdom of Great Britain and Northern Ireland and the United States of America.

The interest charge will generally only apply in relation to distributions of accumulated trust income by a non-resident trust estate to a resident beneficiary where the accumulated income had not previously been subject to the transferor tax measures.

Where the trust estate is not a listed country trust estate in the non-resident trust's year of income, a distribution made from so much of the income and profits of the trust estate of that year of income as has not been subject to tax in any listed country in a tax accounting period ending before the end of the non-resident trust's year of income or commencing during the non-resident trust's year of income will be subject to the interest charge

As Country C is not a listed country, you will be liable to pay interest pursuant to section 102AAM of the ITAA 1936.

In summary, you will need to consider section 99B of the ITAA 1936 in relation to distributions you receive from the trust. If the exclusions do not apply, an amount will be assessable under section 99B of the ITAA 1936 and you will be liable to pay interest under section 102AAM of the ITAA 1936.

5. Assessability in respect of shares under Division 83A of the ITAA 1997 or any predecessor provision

Whilst living in Country B you were employed by Company M but ceased to be employed during the 2011-12 income year. As an employee, you were allowed to acquire shares in Entity N.

As stated in the facts, all the shares held by you are 'vested shares' as defined in the Agreement.

As the shares vested at the time you were a non-resident of Australia for tax purposes, no benefit is included in your assessable income under Division 83A of the ITAA 1997 or any predecessor provision.

6. CGT event A1

You make a capital gain or a capital loss if and only if a capital gains tax (CGT) event happens to a CGT asset.  A CGT asset is any kind of property or a legal or equitable right that is not property. A share is a CGT asset.

CGT event A1 happens if you dispose of a CGT asset. You dispose of a CGT asset if a change of ownership occurs from you to another entity. The time of the event is when you enter into the contract for the disposal or if no contract, when the change of ownership occurs.

The disposal of the Entity N shares by you to Company Q will give rise to CGT event A1 happening.

7. Capital gains tax consequences of exercising an option and the relevant date for the acquisition of the BV shares

Taxation Determination TD 16 provides that the date of disposal of an asset under an option is the date of the transaction entered into as a result of the exercise of the option.

The relevant date for the acquisition of the Entity N shares is the date the option is exercised. Under subsection 104-40(5) of the ITAA 1997 when the right is exercised, the capital gain or capital loss made by the grantee (the person that exercises the option) is disregarded. 

As mentioned above CGT event A1 will happen on the disposal of the shares by you to Company Q.

Timing of CGT event A1

You have argued that the disposal of the Entity N shares will take place before you became an Australian resident for tax purposes. You also consider that you will not be bringing the Entity N shares into the Australian tax net.

The steps involved in the disposal of the Entity N shares are as follows:

1. The service of a value notice by Company Q, which serves to fix the price of Entity N shares. A value notice is served at the start of each calendar year.

2. The annual service of a call option notice by Company Q, or failing that, a put option notice by you.

3. The entering into a share purchase agreement.

You claim the timing of the CGT event A1 should be when the value notice is served to you by Company Q setting the price of the Entity shares for that particular year.

The question of whether a particular agreement is an option agreement or a contract for the acquisition of an asset will depend on how the contract stipulates when the parties intend to enter into contractual relationships in relation to the acquisition of the underlying asset (Van v. FCT (2002) AATA 1313 and TD 16).

In order to be considered a contract for the acquisition of an asset, the option agreement would have to be carefully structured with sufficient certainty so that the acquisition date of the shares was when the option was granted (as opposed to the later date of when the option is exercised).

In this case the Put and Call Option Agreement does not have sufficient certainty, for instance:

· It does not set a specific date on which the call or put option must be exercised - the date does not get set until the call or put option is given.

· Whilst the value notice sets a fixed price for the Entity N shares, it is stated clearly in the value notice that Entity N shares are still 'held' by the taxpayer and it is not until the option notices are provided that Company Q is 'buying' the shares. As a result, ownership does not change on the giving of the value notice.

· Value notices are provided at the start of every calendar year. As a result, the value is set to change for each tranche of shares for the following four years.

As a result, when you became an Australian resident for tax purposes on date X, you are taken to own the Entity N shares still subject to the unexercised Put and Call Option Agreement.

8(a). Capital proceeds

Section 116-20 of the ITAA 1997 provides that the capital proceeds from a CGT event are the total of the money received and the market value of any other property received, or entitled to receive, worked out at the time of the event.

In your case the service of the Value Notice by Company Q serves to fix the price at which the shares are sold by you. Thus the capital proceeds will be the dollar equivalent of the amount payable as determined by reference to the Value Notice at the date the Call Option/Put Option is exercised.

As you may receive an additional amount from Company Q, this will need to be taken into account in calculating your capital proceeds. You have stated that it is understood that the additional amount will be taxable in Country B on receipt by you. A credit may be claimed for the foreign tax paid when completing your tax return.

8(b). Cost base of BV shares

The first element of the cost base of the shares that you bring with you to Australia into the Australian tax net will be the market value of the shares on the date you became an Australian resident for tax purposes (section 855-45 of the ITAA 1997). This is the case even if the market value differs from the sale price set by the Value Notice.

8(c). CGT Discount

You will be eligible for the CGT discount under Division 115 of the ITAA 1997 on shares sold at least 12 months after you became an Australian resident.

8(d). Foreign exchange gains or losses

Division 775 of the ITAA 1997 deals with foreign currency gains and losses and ensures they are brought to account when realised, regardless of whether there is an actual conversion of foreign currency amounts into Australian dollars. The general principle is that foreign currency gains usually have a revenue character with the result that such gains are usually assessable income. Conversely, foreign currency losses are allowable deductions.

Forex realisation event 2 (FRE 2)

You make a forex realisation gain or loss only when a forex realisation event happens. Subsection 775-45(1) of the ITAA 1997 provides that FRE 2 happens if an entity ceases to have a right, or part of a right, to receive foreign currency which is created or acquired in return for paying an amount of Australian currency or foreign currency. Subsection 775-45(2) of the ITAA 1997 provides that the time of FRE 2 is when the right or part of the right ceases.

CGT event K10 - Certain short-term forex realisation gains

CGT event K10 happens if:

· An entity makes a forex realisation gain as a result of FRE 2 and

· Item 1 of the table in subsection 775-70(1) of the ITAA 1997 applies (section 104-260 of the ITAA 1997)

The time of the event is when the FRE happens. Only a capital gain can arise (not a capital loss) when CGT event K10 happens.

CGT event K11 - Certain short-term forex realisation losses

CGT event K11 happens if:

· An entity makes a forex realisation loss as a result of FRE 2 and

· Item 1 of the table in subsection 775-75(1) of the ITAA 1997 applies (section 104-265 of the ITAA 1997)

The time of the event is when the FRE happens. Only a capital loss can arise (not a capital gain) when CGT event K11 happens.

In summary, the foreign exchange position is governed by item 1 of the table in subsection 775-70(1) of the ITAA 1997 in the event of a forex realisation gain being made in respect of the amount payable on a sale of shares and by item 1 of the table in section 775-75(1) of the ITAA 1997 in the event of a forex realisation loss being made in respect of the amount payable on a sale of shares.

It follows that either CGT event K10 (for a gain) or K11 (for a loss) happens.

In your case any foreign exchange gains or losses will be dealt with in accordance with sections 775-70 and section 775-75 of the ITAA 1997 as well as sections 104-260 and 104-265 of the ITAA 1997.

9. Personal use asset and shares

A personal use asset is a CGT asset, other than a collectable, that is used or kept mainly for person use or enjoyment of the taxpayer. It includes an option or right to acquire such an asset (section 108-20 of the ITAA 1997). It also includes a debt arising from a CGT event relating to such an asset, and a debt arising other than from income-producing activities.

A share is not personal use asset. Therefore the right to receive a payment from the disposition of shares is not a personal use asset.

We have noted your concern that if CGT event K11 applies, a question arises as to whether the capital loss is disregarded pursuant to section 108-20 of the ITAA 1997 which requires capital losses made from a personal use asset to be disregarded. As explained a debt that arises from the sale of shares is not a personal use asset as defined in paragraph 108-20(2)(d) of the ITAA 1997 as the debt will have arisen in the course of the production of your assessable income.

10. Financial arrangement and Division 230 of the ITAA 1997

Division 230 of the ITAA applies to the taxation of financial arrangements (TOFA).

Gains made from financial arrangements are included in assessable income and losses from financial arrangements are deductible to the extent that they are made in the gaining or producing of assessable income (section 230-15 of the ITAA 1997).

There are certain exemptions from the TOFA rules and these are listed in Division 230-H of the ITAA 1997. One of the exemptions is contained in section 230-455 of the ITAA 1997 (certain taxpayers where no significant deferral). Under this provision, the TOFA rules do not apply in relation to a gain or loss from a financial arrangement for any income year if:

· The taxpayer is an individual; or

· The arrangement is to end not more than 12 months after the taxpayer has stated to have it; or

· The arrangement is not a qualifying security.

You have stated that Division 230 of the ITAA 1997 will not apply to you as the exception under section 230-455 of the ITAA 1997 will apply to your financial arrangement as:

· you are an individual

· the arrangement is not a qualifying security

· the arrangement will end within 12 months.

Accordingly any financial arrangement you enter into will be excluded from the TOFA rules under Division 230 of the ITAA 1997.