Edited version of your written advice

Authorisation Number: 1012928902390

Date of advice:

Ruling

Subject: Capital gains tax

Questions and answers

1. Does Australia have taxing rights under the double Tax Agreement between Australia and Country Y on the sale of the properties in Country Y?

Yes.

2. Will the Commissioner exercise the discretion to extend the 2 year time period in section 118-195 of the Income Tax Assessment Act 1997 on the X bedroom property?

Not applicable.

3. Are the other properties subject to capital gains tax?

Yes.

4. Are you entitled to a Foreign Income Tax Offset (FITO) on the tax already paid on the other properties in Country Y?

Yes.

This ruling applies for the following period:

Year ending 30 June 2015

The scheme commenced on:

1 July 2014

Relevant facts and circumstances

You came to Australia a number of years ago with your spouse.

Parent A died a number of years ago.

Parent B died a year after parent A.

You were granted permanent residency in Australia after Parent B died.

You inherited a number of properties when Parent B died.

All the properties were obtained after 20 September 1985 and were in Parent A's name

Parent B had legal ownership of the properties and they lived in the X bedroom apartment as their main residence up until they died.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 118-195(1)

Reasons for decision

Subsection 6-5(2) of the Income Tax Assessment Act 1997 (ITAA 1997) provides that the assessable income of a resident taxpayer includes ordinary income derived directly or indirectly from all sources, whether in or out of Australia, during the income year.

In determining your liability to pay tax in Australia it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreements.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 1936 (ITAA 1936) and the ITAA 1997 so that all three Acts are read as one. The Agreements Act overrides both the ITAA 1936 and ITAA 1997 where there are inconsistent provisions (except in some limited situations).

Section 5 of the Agreements Act states that, subject to the provisions of the Agreements Act, any provision in an Agreement listed in section 5 has the force of law. The Country Y Agreement is listed in section 5 of the Agreements Act.

The agreement between Australia and Country Y operates to avoid the double taxation of income received by residents of Australia and Country Y directly or indirectly from all sources, whether in or out of Australia, during the income year.

Article XX of the agreement between Australia and Country Y deals with the alienation of property.

It gives both countries taxing rights.

The capital gains provisions under the ITAA 1997 will apply to the sale of the properties in Country Y.

There are special capital gains tax (CGT) rules that apply if you become an Australian resident for taxation purposes.

If an individual becomes an Australian resident for CGT purposes, special cost base and acquisition rules apply in respect of each CGT asset owned by the taxpayer just before becoming a resident. However, the rules do not apply to pre-CGT assets or assets that are taxable Australian property, such as property located in Australia.

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.

The special cost base rule provides that the first element of the cost base and reduced cost base of an asset is its market value at the time the taxpayer becomes a resident.

You are taken to have acquired the properties in Country Y on the day you became an Australian resident for the market value on this date.

A capital gain or capital loss is made when a CGT event happens to a CGT asset you own. The most common CGT event is CGT event A1 which occurs when your ownership interest in a CGT asset is transferred to another entity, such as the disposal of a property.

You make a capital loss when the capital proceeds received for the disposal of your capital asset are less than the reduced cost base of the asset.

Capital losses are applied to capital gains made in the same income year. If your capital losses exceed your capital gains for the income year, you will have a net capital loss. Net capital losses are applied against future capital gains to the extent that they have not already been. Where you have not been able to apply a net capital loss against a capital gain, that part of the loss is able to be carried forward to a later income year.

Subsection 118-195(1) of the Income Tax Assessment Act 1997 (ITAA 1997) states that if you are an individual who owns a dwelling in a capacity as trustee of a deceased estate, then you are exempt from tax on any capital gain made on the disposal of the property acquired by the deceased after 20 September 1985 if: 

• the property was the deceased's main residence just prior to their death

• it was not being used to produce assessable income at this time, and

• Your ownership interest ends within 2 years of the deceased's death.

Parent B inherited the X bedroom apartment from Parent A.

Parent B lived in the apartment as their main residence up until they died.

The property was sold within 2 years of Parent B dying.

The Commissioner does not need to exercise the discretion under section 118-195 (1) to extend the 2 year time period as the property was sold within 2 years of your parent dying.

Therefore any capital gain will be disregarded under section 118-195 of the ITAA 1997 on the X bedroom apartment.

Under the capital gains provisions there is nothing which exempts the other properties in Country Y from capital gains tax.

You are required to declare any gain in your Australian tax return.

Foreign Income Tax Offset (FITO)

If you have paid foreign tax in another country, you may be entitled to an Australian foreign income tax offset, which provides relief from double taxation.

These rules apply for income years that start on or after 1 July 2008. Different rules apply for income periods up to 30 June 2008.

To qualify for a foreign income tax offset (FITO) you must meet all of the following criteria:

• You must have paid the foreign tax on the foreign income,

• The foreign tax must be a tax which you were personally liable for, and

• The income or gain that the foreign tax was paid must be included in your assessable income for Australian income tax purposes.

The foreign income tax offset is a non-refundable tax offset. The foreign income tax offset is applied to your income tax liability including the Medicare levy and the Medicare levy surcharge where applicable. Any excess is not refunded to you.

You are eligible for a FITO on the tax you paid in Country Y on the properties.