Edited version of your written advice

Authorisation Number: 1012705415641

Ruling

Subject: Capital gains tax

Question 1

Will a capital gains tax event occur when you dispose of your interest in the land located overseas?

Answer

Yes.

Question 2

Is the first element of your cost base the market value, in Australian dollars, as at the day it was gifted to you?

Answer

Yes.

Question 3

Are you required to provide details of money transfers into Australia to AUSTRAC?

Answer

Decline to rule - no relevant provision.

This ruling applies for the following period

Year ending 30 June 2015

The scheme commenced on

1 July 2014

Relevant facts and circumstances

Your parent gifted you a block of land in country X after 20 September 1985.

You are planning to sell the block of land and bring the money to Australia so that you can buy your first home in Australia.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 100-10

Income Tax Assessment Act 1997 Section 100-45

Income Tax Assessment Act 1997 Section 102-20

Income Tax Assessment Act 1997 Section 104-10

Income Tax Assessment Act 1997 Section 108-5

Income Tax Assessment Act 1997 Section 110-25

Income Tax Assessment Act 1997 Section 112-30

Income Tax Assessment Act 1997 Section 960-50

Taxation Administration Act 1953 Section 357-55 of Sch 1

Reasons for decision

Capital gains tax

All references are to the Income Tax Assessment Act 1997 (ITAA 1997).

Section 102-20 advises that you make a capital gain or loss when a capital gains tax (CGT) event takes place. CGT events are the different types of transactions that may result in a capital gain or capital loss. The most common CGT event is CGT event A1.  Section 104-10 explains that this event occurs whenever there is a change of ownership for a CGT asset, for example, when you dispose of an asset to someone else.

A capital gain is included in your annual income tax return. It is not a separate tax, merely a component of your income tax. Your net capital gain is added to your annual income and you are taxed at your marginal tax rate.

You have an ownership interest in a block of land, located overseas, which you acquired as a gift from your father. Any kind of property such as land or buildings, are stated as being CGT assets under section 108-5. Australian residents make a capital gain or capital loss if a CGT event happens to any of their CGT assets anywhere in the world.

The timing of the event determines which income year you show your capital gain or capital loss. If you sell or otherwise dispose of an asset to someone else, the CGT event happens when you enter into the contract of sale, or if there is no contract, when the change of ownership occurs.

When you sign a contract for the disposal of your land a CGT event A1 will take place and you will need to declare your net capital gain in your income tax return in the financial year in which the disposal takes place.

The steps to follow in determining whether there is a capital gain or capital loss for most CGT events are:

1. determine the capital proceeds from the CGT event;

2. determine the cost base for the CGT asset (see below);

3. subtract the cost base from the capital proceeds;

4. where the proceeds exceed the cost base, the difference is the capital gain;

5. if the proceeds do not exceed the cost base then determine whether there is a capital loss by working out the reduced cost base of the asset;

6. if the reduced cost base exceeds the capital proceeds, the difference is the capital loss; and

7. if the capital proceeds are less than the cost base but more than the reduced cost base then there is neither a capital gain or a capital loss.

You will then have your total capital gain from this CGT event. These steps need to be taken for each CGT event that has occurred during the financial year. You then calculate your net capital gain as follows:

8. Add all your total capital gains for the year and then reduce that sum by any capital losses you may have for the year. If the capital losses exceed the capital gains, the difference is your net capital loss. A net capital loss is not deductible from your assessable income but it can be carried forward for offset against capital gains in later years.

9. Reduce any remaining capital gains by any unapplied net capital losses you may have brought forward from previous years.

10. Reduce any remaining capital gains by the discount percentage which is 50%.

Cost base

The cost base of a CGT asset is generally what it costs you. It is made up of five elements:

1. The money paid, or required to be paid, in respect of acquiring the CGT asset, or the market value of any other property given, or required to be given, in respect of acquiring the CGT asset (see below).

2. Incidental costs of acquiring the asset, or costs in relation to the CGT event. These costs include stamp duty, legal fees, agent's commission, fees paid for professional services.

3. Non-capital costs incurred in connection with ownership, for example, interest, rates, land tax, repairs and insurance premiums (provided that these expenses have not, or could not, have been claimed as a 'deduction', for example, rental deduction). They also include non-deductible interest on loans used to finance capital expenditure incurred to increase an asset's value.

4. Capital expenditure incurred to increase the value of the asset, if the expenditure is reflected in the state or nature of the asset at the time of the CGT event, for example, extensive renovations undertaken to the CGT asset. For example, if you constructed a building on the land which increased the total value and this was reflected in the sale price.

5. Capital expenditure incurred to preserve or defend the title or rights to the asset. For example, if your right to ownership of the land was challenged and you incurred expenses to defend your ownership.

Should a capital loss be made in relation to the sale of the property, the third element is excluded from the cost base. The resulting cost base is known as a reduced cost base.

Note that if any of the above expenses have been or are allowed as a deduction in your annual tax returns, you are not able to include them in the cost base.

Market value substitution rule

Because you did not pay anything to acquire the land, the first element of the cost base will be its market value at the time it was given to you. A market valuation may be undertaken by one of the following:

• a registered valuer;

• a member of a recognised professional valuation body;

• a director, for balance sheet purposes;

• a person without formal valuation qualifications whose assessment is based on reasonably objective and supportable data.

According to legal precedent, experts who assess market value should have specific knowledge, experience and judgment in that particular field. While professional qualifications may add weight to the valuer's opinion, he or she should also display personal integrity and competence. To ensure the objectivity of the report, the valuer should be independent of the interests of the party commissioning the report. As an example, a real estate agent who has experience and knowledge of the sales history in the area would be an acceptable source for seeking market valuation.

Conversion to Australian dollars

Section 960-50 states that all amounts are to be converted into the equivalent amount of Australian currency at the time of the transaction or event. This means that when you determine the market value of the property you will need to convert the market value into the equivalent amount of Australian currency applicable on the day the land was given to you. This amount will be the first element of your cost base.

Similarly, any expenditure that falls within the elements of the cost base after that date should be converted into Australian currency on the date of payment of the expenditure.

When you do sell the land, the capital proceeds from its sale are to be converted to Australian currency on the date you sign the contract for sale, which is the time of the CGT event.

The ATO's website contains details of both current and prior years foreign exchange rates. Enter the Quick Code 16136 in the search field to locate the details.

As you have owned the land for more than 12 months you are entitled to reduce your capital gain by the discount capital gain amount of 50%.