Edited version of your private ruling

Authorisation Number: 1012550640610

Ruling

Subject: Capital gains and ordinary income

Questions and answers:

1. Are you liable for Capital Gains Tax on the sale of land overseas even though the amount is meant for the purpose of you and spouse settling in Australia as per sponsorship requirements?

Yes.

2. Are you eligible for small business relief from Capital Gains Tax?

No.

3. Is the receipt of loan repayments from a family member assessable income in Australia?

No.

This ruling applies for the following period:

Year ended 30 June 2010,

Year ended 30 June 2011,

Year ended 30 June 2012,

Year ended 30 June 2013,

Year ended 30 June 2014,

Year ended 30 June 2015.

The scheme commenced on:

1 July 2009.

Relevant facts:

You received permanent residence in Australia.

Prior to which you were a temporary resident.

There was a state sponsorship condition that you bring in not less that $X in capital.

So far you have brought in $X to buy personal use assets from the sale of your properties overseas.

You still have to dispose of land located overseas, with a value of approximately $X.

The property has been for sale for several years.

After selling some properties overseas you loaned money to a family member interest free. You are being repaid instalments.

You have recently found employment as a professional.

You spouse has been supporting the family as a professional.

Relevant legislative provisions:

Income Tax Assessment Act 1997 Section 768-910

Income Tax Assessment Act 1997 Section 6-5

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 855-45(2)

Income Tax Assessment Act 1997 Division 152

Income Tax Assessment Act 1997 Section 152-10(c )(i)

Income Tax Assessment Act 1997 Section 995-1

Income Tax Assessment Act 1997 Section 328-110

Reasons for decision

Australian residency

Section 768-910 of the Income Tax Assessment Act 1997 (ITAA 1997) states that assessable income of a temporary resident which has a foreign source is non-assessable non-exempt income.

Section 6-5 of the ITAA 1997 provides that where you are a resident of Australia for taxation purposes, your assessable income includes income gained from all sources, whether in or out of Australia. 

You have moved from overseas to Australia and were a temporary resident for a time before gaining Australian permanent residency.

Capital gains tax

Capital gains tax (CGT) is the tax you pay on certain capital gains you make and section 102-20 of the ITAA 1997 states that you may make a capital gain or capital loss as a result of a 'CGT event'. 

The most common CGT event is CGT event A1 and this occurs when an entity disposes of the ownership interest in an asset. The sale of a dwelling or land would be considered to be a CGT event A1.

You are planning to sell land located overseas. As an Australian resident your assessable income will include income from outside of Australia, namely any capital gain made on the sale of land.

Calculation of a capital gain compares the cost of the asset to any proceeds from sale. In this case, the cost of the asset is calculated based on a cost base modification rule, section 855-45(2) of the ITAA 1997. The market value substitution rule will act to replace the first element of the cost base with market value of the land at the time you became a Australian resident.

Small business relief

Some small business taxpayers are able to access relief from capital gains under Division 152. Under section 152-10(c )(i) you need to be a small business entity. Small business entity is defined in section 995-1 as having the meaning in section 328-110.

Section 328-110 of the ITAA 1997 includes in its qualification criteria that, to be a small business entity for an income year, you must carry on a business.

You are an individual employee and are currently employed as a professional. You will not be eligble for small business CGT relief on the sale of land from overseas.

Ordinary income

Section 6-5(1) states that assessable income includes 'income according to ordinary concepts'. This reflects a statement in Scott v. C of t (NSW), where the question of whether an amount is income 'must be determined in accordance with the ordinary concepts and usages of mankind'.

You made an interest free loan to a family member, who are currently repaying this amount to you via instalments. As such under section 6-5(1) no ordinary income will arise as a result of this transaction.

Further issues for you to consider:

You should consider the cost base rules in Division 110 and information on our website www.ato.gov.au, which outlines how to calculate the remaining elements of your cost base.

You may be entitled to discount your capital gain by 50% see section 115-15 of the ITAA 1997.