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Edited version of your private ruling
Authorisation Number: 1012523064215
Ruling
Subject: Capital gains tax - CGT discount for foreign resident individuals
Question 1
For the purpose of the requirement to have the market value of the property as at 8 May 2012 in paragraph 115-115(4)(d) of the Income Tax Assessment Act (ITAA) 1997, is it correct to use the average of the 3 valuations?
Answer
Yes
Question 2
Has the discount capital gain been correctly determined in accordance with Part 3-1 of the ITAA 1997?
Answer
No
This ruling applies for the following periods:
1 July 2014 - 30 June 2015
The scheme commences on:
Not yet commenced
Relevant facts and circumstances
· The taxpayer is a non-resident of Australia. The taxpayer and their spouse have had no period of residency in Australia since 8 May 2012.
· They acquired the property as 50/50 joint tenants for $a.
· Stamp duty on the purchase of the property was $b.
· 3 valuations were obtained for the value of the property as at 8 May 2012:
o $c
o $d
o $e
· The 6 year temporary absence period for the capital gains tax purposes is f days.
Assumption(s)
1. The market value of the property as at 8 May 2012 was $(c+d+e)/3.
2. The property will be sold.
3. The property will be sold for $g.
4. Stamp duty on disposal will be $d and conveyancing costs will be $h.
5. The total number of days in the ownership period will be i including leap years.
6. Tax will be payable on any capital gain made on the disposal of the property at 45cents in the $1 over $180,000, with the tax payable up to $180,000 being $63,000.
Relevant legislative provisions
Income Tax Assessment Act 1997 paragraph 115-115(4)(d)
Income Tax Assessment Act 1997 subsection 118-145(2)
Reasons for decision
For the purpose of the requirement to have the market value of the property as at 8 May 2012 in paragraph 115-115(4)(d) of the Income Tax Assessment Act (ITAA) 1997, it is correct to use the average of the 3 valuations.
Detailed reasoning
The new laws with respect to non-residents and the capital gains tax (CGT) discount became law on 29 June 2013. These new laws basically require any individuals who had a period of non-residency and disposed of a CGT asset after 8 May 2012 to apportion their discount percentage.
If individuals are temporary or non-residents as at 8 May 2012, they can only receive the discount for the gain from a CG asset that accrued prior to the announcement (8 May 2012). The market value of the asset as at 8 May 2013 is required in order to be eligible for the CGT discount on pre-announcement gains.
New laws changes are in subdivisions 115-A and 115-B of the ITAA 1997.
Paragraph 115-115(4)(d) of the ITAA 1997 states:
(d) the CGT asset's market value on 8 May 2012 exceeds the amount that was its cost base at the end of that day; and
This indicates that a market value as at 8 May 2013 is required to work out your CGT discount percentage.
For details of the new CGT discount that applies to a foreign resident individual from 8 May 2012, refer to publications CGT discount for foreign resident individuals and Capital gains tax Market valuation for tax purposes which are available on the Australian Taxation Office internet site www.ato.gov.au.
On page 3 of the Capital gains tax - Market valuation for tax purposes,
The three basic valuation methods for properties are:
· a direct, sales or market comparison approach
· depreciated replacement cost approach, and
· income-based approaches.
The 3 market valuation reports for the property as at 8 May 2012 that you submitted are based on a direct, sales or market comparison approach.
Each of the valuations provides a market valuation that is acceptable for paragraph 115-115(4)(d) of the ITAA 1997 purposes. Therefore, an average of the 3 valuations is also acceptable.
Question 2
Summary
The discount capital gain has not been correctly determined in accordance with Part 3-1 of the ITAA 1997.
Detailed reasoning
Based on the information supplied, we use the CGT discount worksheet link of the CGT discount for foreign resident individuals to calculate your capital gains.
$j is your capital gains before the main residence exemption.
Subsection 118-145(2) of the ITAA 1997 allows the taxpayer to treat the property for producing assessable income as their main residence for a period of 6 years.
Total days of ownership: |
k |
6 years main residence days |
l |
Non-main residence days |
M |
Therefore, capital gains after main residence exemption is
(m/k) x $j= $n
Capital gains after 50% split with joint owner is
$n/2 = $p
Based on the valuation and information provided, the estimated payable is $(X+q) = $r.