Edited version of your written advice

Authorisation Number: 1012918591105

Date of advice: 30 November 2015

Ruling

Subject: Elements of the cost base when an individual becomes an Australian resident

Question 1

Can you include capital expenditure, incurred before becoming a resident of Australia, in the cost base of a rental property that you sold overseas?

Answer

No.

This ruling applies for the following period:

Year ended 30 June 2015

The scheme commences on:

1 July 2015

Relevant facts and circumstances

You immigrated to Australia in 20XX.

Prior to emigrating you owned a rental property.

You had capital works done as well as initial purchase costs prior to emigrating which were never claimed on your overseas tax returns:

At the time of having these capital works done, you did not know what you would be doing with the property.

You had a real estate agent appraise the market value of the property at the time you emigrated.

Relevant legislative provisions

Income Tax Assessment Act 1997 Part 3-1,

Income Tax Assessment Act 1997 Part 3-3,

Income Tax Assessment Act 1997 Section 855-45 and

Income Tax Assessment Act 1997 Subsection 855-45(3).

Reasons for decision

If you are a resident of Australia for taxation purposes, your assessable income in Australia includes your worldwide income, including any capital gains you make from the disposal of capital gains tax (CGT) assets that you own in Australia or overseas.

The CGT provisions of Australia's tax law are contained in Parts 3-1 and 3-3 of the Income Tax Assessment Act 1997 (ITAA 1997).

A CGT asset must have been acquired on or after 20 September 1985 for the CGT provisions to apply to it. Real estate is a CGT asset and does not have to be Australian real estate for the CGT provisions to apply to it.

The cost base is made up of the following five elements:

• The first element: money or property given for the asset.

• The second element: incidental costs of acquiring the asset or that relate to the CGT event.

• The third element: costs of owning the asset.

• The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

• The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.

In most cases the time of acquisition of a CGT asset will be the time it was purchased and the cost base of the asset will be made up of the costs associated with the five elements described above. However, the rules about acquisition and cost base of CGT assets are modified in certain cases.

Under the special acquisition rule, if you became an Australian resident on or after 12 December 2006, you are taken to have acquired assets that were not taxable Australian property, such as an overseas property, at the time you became an Australian resident.

Section 855-45 of the ITAA 1997 states the individual is taken to have acquired the property on the date they become an Australian resident (and the CGT provisions apply to the property from that date forward), and the first element of the cost base is the market value of the property at the date they became an Australian resident.

Subsection 855-45(3) of the ITAA 1997 goes further to include the other elements of the cost base; as established in Par 3-1 of the ITAA 1997. All elements of the cost base are calculated from the date the individual became an Australian resident until a CGT event occurs.

The market value at the date of an individual becoming an Australian resident is taken to be inclusive of all elements of the cost base prior to that date.

Application to your circumstances

In your situation, the first element of the cost base of the property is its market value at the time you became an Australian resident. You are treated as having acquired those assets on the day you became a resident. Any expenditure on other elements of the cost base you incurred before that day is not included. However, expenditure on other elements incurred after the day you became an Australian resident can be included in the cost base.