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Edited version of your private ruling
Authorisation Number: 1012514445428
Ruling
Subject: Foreign income tax offset and capital losses
Questions and answers:
1. Are you entitled to a foreign income tax offset in relation to a foreign capital gain that is not included in your assessable income in Australia?
No.
2. Are you entitled to carry forward your net capital loss from the relevant income year to future years?
Yes
This ruling applies for the following period:
1 July 2012 to 30 June 2013.
The scheme commenced on:
1 July 2012.
Relevant facts and circumstances:
You are an Australian resident for tax purposes.
You sold an overseas property.
You made a capital gain on the sale of the property in the country that the property was located. You declared that gain in that country and you paid tax on that gain in that country.
When you converted the cost base of the property and the capital proceeds you received for the disposal of the property (the relevant amounts) into Australian dollars, you made a capital loss on the disposal for Australian income tax purposes.
The loss made on the disposal of the overseas property after the conversion of the relevant amounts means you will make a net capital loss for Australian taxation purposes in the relevant financial year.
Relevant legislative provisions:
Income Tax Assessment Act 1997 Division 770.
Income Tax Assessment Act 1997 Section 770-10.
Income Tax Assessment Act 1997 Section 6-5.
Income Tax Assessment Act 1997 Section 6-10.
Income Tax Assessment Act 1997 Division 102.
Income Tax Assessment Act 1997 Section 102-5.
Income Tax Assessment Act 1997 Section 102-10.
Reasons for decision
Foreign income tax offset
The foreign income tax offset (FITO) rules are contained within Division 770 of the Income Tax Assessment Act 1997 (ITAA 1997).
Section 770-10 of the ITAA 1997 provides that a FITO is only available when the tax paid in another country has been paid on an amount that is been included, in full or in part, in your assessable income in Australia.
The provisions of section 770-10 of the ITAA 1997 are echoed in the ATO Guide to foreign income tax offset rules 2012-13 (the FITO Guide) which states that to be entitled to a FITO, the income or gain on which the foreign income tax was paid must be included in a taxpayer's assessable income in Australia.
The FITO Guide also notes that where foreign income tax is paid on a foreign source gain, but the taxpayer is in an overall capital loss situation (in Australia) for the income year because of other capital losses, none of the foreign income tax paid on the overseas gain counts towards a FITO because the overseas gain is not included in the taxpayer's assessable income in Australia.
You made a capital gain on the sale of an overseas property. You declared the gain in the country the property was located and you paid tax on that gain in that country. However, when you converted the relevant amounts into Australian dollars, you made a capital loss on the disposal for Australian income tax purposes and you have made a net capital loss for Australian taxation purposes in the relevant financial year. As a result, no part of the gain on which you paid tax in the overseas country is included in your assessable income in Australia and you are not entitled to a FITO for the tax paid on that gain overseas.
Capital gain tax - carrying forward capital losses
As a resident of Australian for taxation purposes, you assessable income in Australia includes all your ordinary and statutory income from all sources in or out of Australia in an income year. Capital gains are forms of statutory income and capital losses are taken into consideration when determining whether or not you have made a net capital gain or loss in a particular income year.
When you incur a net capital loss in an income year you cannot deduct that loss from your assessable income. However, a net capital loss can be carried forward to later income years to be deducted from future capital gains and there is no time limit on how long you can carry forward the loss.
For Australian income tax purposes you made a capital loss on the disposal of the overseas property and you will have a net capital loss for the relevant financial year. You cannot deduct that loss against your assessable income for the year. However, you can carry that loss forward to later income years to be deducted against future capital gains.
Conclusion
You are not entitled to a FITO for tax paid in the overseas country on the gain made for the disposal of the overseas property.
For Australian taxation purposes, you are entitled to carry forward your net capital loss for the relevant financial year be deducted against future year capital gains.