Edited version of your written advice

Authorisation Number: 1012978419546

Date of advice: 3 March 2016

Ruling

Subject: Shares

1. Are you entitled to a foreign tax offset or imputation credit on the dividend income from Country A?

No

2. Are you entitled to ignore currency fluctuations between the date of acquisition and the date of disposal of a foreign CGT asset when calculating the capital gain or capital loss on sale of shares in Country A?

No

This ruling applies for the following period

Year ended 30 June 2013

Year ended 30 June 2014

Year ended 30 June 2015

Year ended 30 June 2016

Year ended 30 June 2017

Year ended 30 June 2018

Year ended 30 June 2019

The scheme commenced on

1 July 2012

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian resident for income tax purposes.

You relocated to Australia a few years ago.

You are retired. Your retirement income comes from dividends from company shares bought in Country A with funds derived entirely from Country A.

Country A operates a one-tier corporate taxation system. Previously, Country A operated a full imputation system for all companies where corporate income was only subject to tax once at the shareholders' level at their respective marginal income tax rates.

The one-tier corporate taxation system was introduced in Country A to replace the imputation system. Under this system, profits are taxed at the corporate level and this is a final tax.

Country A dividends are tax exempt in the hands of the shareholder.

You receive dividends from Country A. The amount you receive is after company tax has been paid by the company.

You intend to sell your shares in Country A.

There is a tax treaty between Australia and Country A.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 6-10

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 Section 10-5

Income Tax Assessment Act 1997 Division 770

Income Tax Assessment Act 1997 Section 855-45

Income Tax Assessment Act 1997 Section 960-50

Income Tax Assessment Act 1936 Subsection 44(1)

International Tax Agreements Act 1953

International Tax Agreements Act 1953 Section 4

Reasons for decision

1. Country A dividends

Dividends paid by a non-resident company

An Australian resident is required to include all dividends in calculating their assessable income for an income year, regardless of whether the company is a resident of Australia or a non-resident (subsection 44(1) of the Income Tax Assessment Act 1936 (ITAA 1936).

In determining liability to Australian tax on foreign source income it is necessary to consider not only the income tax laws but also any applicable tax treaty contained in the International Tax Agreements Act 1953 (Agreements Act).

Section 4 of the Agreements Act incorporates that Act with the ITAA 1936 and ITAA 1997 so that those Acts are read as one.

The Agreements Act contains the tax treaty between Australia and Country A (the Country A Agreement). The Country A Agreement operates to avoid the double taxation of income received by Australian and Country A residents.

Article X of the Country A Agreement deals with dividends, and it states that both Australia and Country A may tax the dividend income. However, the tax payable in Country A is limited to a maximum of 15% of the gross amount of the dividends.

Article Y of the Country A Agreement provides that subject to the laws of Australia, the Country A tax paid by an Australian resident in respect of income derived from Country A shall be allowed as a foreign tax offset against the Australian tax payable on that income.

Foreign income tax offset

The foreign income tax offset (FITO) rules are designed to protect a taxpayer from the double taxation that may arise where the taxpayer pays foreign tax on income that is also taxable in Australia. This is achieved by allowing a taxpayer to claim a tax offset where they have paid foreign tax on amounts included in their assessable income.

It is important to note that a taxpayer may only claim a foreign tax credit for any taxes the taxpayer is personally liable for in respect of the income received.

Country A has a one-tier corporate taxation system. Under this system, profits are taxed at the corporate level and this is a final tax. Country A dividends are tax exempt in the hands of the shareholder.

If a taxpayer receives a dividend paid under a one-tier corporate tax system, such as in Country A, they declare the amount of the dividend. The taxpayer is not entitled to a credit for the tax paid, because the tax paid is the liability of the company and not the personal liability of the taxpayer.

Where the dividend is exempt from tax, as in Country A, the taxpayer is required to declare the amount of dividend. As no tax has been paid by the taxpayer, no credits may be claimed by the taxpayer.

The dividend income you receive from Country A is determined after the company tax has been paid by the company. You are not required to declare any share of the company's income, just your dividend.

As you do not pay any tax or are personally liable to any tax in relation to a company's profits in Country A, you are not entitled to a foreign tax offset or an imputation credit.

2. Calculation of the capital gain or loss on the sale of shares - currency fluctuations

Becoming an Australian resident

The CGT consequences of a non-resident individual becoming an Australian resident are set out in section 855-45 of the Income Tax Assessment Act 1997 (ITAA 1997).

When a taxpayer becomes an Australian resident, other than a temporary resident, there is a rule relevant to CGT assets that they owned before the person becoming an Australian resident. Under this rule, the taxpayer is taken to have acquired the assets at the time they became a resident, for their market value at that time. This rule does not apply to assets that are:

• taxable Australian property; or

• an asset that was acquired before 20 September 1985.

Taxable Australian property includes:

• a direct interest in real property situated in Australia or a mining, prospecting or quarrying right to minerals, petroleum and quarry materials situated in Australia

• a CGT asset that you have used at any time in carrying on a business through a permanent establishment in Australia

• an indirect Australian real property interest - which is an interest in an entity, including a foreign entity, where you and your associates hold 10% or more of the entity and the value of your interest is principally attributable to Australian real property.

In your case you bought shares with funds derived entirely in Country A before you became an Australian resident. You intend to sell your shares in Country A.

When calculating the capital gain or loss on the sale of your shares, the first element of the cost base will be the market value at the date you became an Australian resident and not the actual date you acquired the shares.

Converting into Australian Currency

Section 960-50 of the ITAA 1997 states that an amount in a foreign currency is to be translated into Australian currency. It further provides that for CGT purposes the amount or value is to be translated to Australian currency at the exchange rate applicable at the time of the transaction or event.

In your case, the first element of the cost base of your shares will be the market value, converted into Australian dollars at the exchange rate applicable on the date you became an Australian resident.

Capital proceeds

The sale of a parcel of your shares triggers an event, namely CGT event A1. In calculating the capital gain or loss, whatever you receive as payment because of a CGT event is referred to as your capital proceeds. Where the capital proceeds are in a foreign currency, the amount must be converted into the equivalent of Australian currency at the time of the event.

Due to fluctuations in exchange rates, we acknowledge that a capital loss in Country A currency could translate to a capital gain for Australian tax law purposes.