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Edited version of your written advice
Authorisation Number: 1051351729242
Date of advice: 3 April 2018
Ruling
Subject: CGT disposal of overseas property
Question
Is the gain from the disposal of an overseas property included in your assessable income in Australia?
Answer
Yes.
This ruling applies for the following period
Year ended 30 June 2018.
The scheme commences on
1 July 2017.
Relevant facts and circumstances
Person X was engaged in court proceedings in another country regarding an asset.
Person X passed away before the court proceedings were finalised.
Person Y and Person Z were named as parties to the court proceedings in substitution of and after the death of Person X.
Person Y is an Australian resident.
The court proceedings were favourable to Person Y and Person Z, and have now been finalised.
Person Y and Person Z are now joint owners of an asset in another country.
Person Y wishes to have no interest in the asset and intends to dispose of his interest by way of gift to Person Z.
Person Z will become sole owner of the asset.
Relevant legislative provisions
Income Tax Assessment Act 1997 Section 6-5
Income Tax Assessment Act 1997 Section 6-10
Income Tax Assessment Act 1997 Section 10-5
Income Tax Assessment Act 1997 Section 104-10
Income Tax Assessment Act 1997 Section 112-20
Income Tax Assessment Act 1997 Section 960-50
Reasons for decision
Summary
Detailed reasoning
Your assessable income includes income according to ordinary concepts, which is called ordinary income. Section 6-5 of the Income Tax Assessment Act 1997 (ITAA 97) states that if you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year.
In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.
Subsection 6-10(1) of the ITAA 1997 states that your assessable income also includes some amounts that are not ordinary income.
Amounts that are not ordinary income but are included in your assessable income by provisions about assessable income are called statutory income (subsection 6-10(2) of the ITAA 1997). Your assessable income includes your statutory income from all sources whether in or out of Australia (subsection 6-10(4) of the ITAA 1997).
Section 10-5 of the ITAA 1997 provides a list of the types of income that is not considered ordinary income but must still be included in assessable income. Capital gains income is included in this list.
Real estate is a CGT asset and does not have to be Australian real estate for the CGT provisions to apply to it.
Section 104-10(2) states that CGT event A1 happens if you dispose of a CGT asset.
The market value substitution rule in sub-section 112-20(1) of the ITAA 1997 will apply to determine the first element of the cost base if no money will be exchanged.
For taxation purposes, amounts in foreign currency must be translated in Australian currency. According to section 960-50 of the ITAA 1997, an amount of money received in relation to a CGT event must be translated into Australian currency at the exchange rate applicable at the time of the event.
Application to your circumstances
Based on the limited facts you have provided Person Y is an Australian resident for taxation purposes.
Whilst Person Y was an Australian resident Person X was engaged in court proceedings in another country regarding the ownership of an asset.
During the court proceedings Person X passed away leaving Person Y and Person Z as parties to these proceedings, which concluded in Person Y and Person Z jointly owning an asset in another country.
Person Y has no intention on keeping the asset and intends to transfer their ownership interest to Person Z for no consideration.
Although no money is exchanged a CGT event happens when the asset is transferred from
Person Y to Person Z. As Person Y is a resident of Australia for taxation purposes their assessable income includes any capital gain you derived directly or indirectly from all sources during the income year.
Sub-section 112-20(1) of the ITAA 1997 will apply to determine the first element of the cost base of the asset as the transfer of the asset from Person Y to Person Z was not an arm’s length transaction, no money was paid or required to be paid and no property was given to Person Y for their disposal. Therefore Person Y is considered to have received the market value for the asset.
Conclusion
Being a resident of Australia for taxation purposes you are taxed on all assessable income, whether in or outside Australia. The capital gain made on the sale of an asset you own that is located outside of Australia is included in your individual tax return and taxed at your marginal rates. You are considered to have disposed of the asset at its market value at the time it was transferred.