Edited version of your written advice

Authorisation Number: 1051496477952

Date of advice: 20 March 2019

Ruling

Subject: Disposal of shares

Question

Is the capital gain from the sale of your shares in Company X subject to income tax in Australia?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 2017

Year ended 30 June 2018

The scheme commences on:

1 July 2016

Relevant facts and circumstances

You worked for the Company X Group in Australia and Country X for over 10 years.

You were initially a tax resident of Australia but became a non-resident after you relocated to Country X to work.

When you stopped being an Australian resident, you did not take Capital gains tax (CGT) event I1 into account. This event deals with the treatment of CGT assets held by an individual or company when they stop being an Australian resident for tax purposes.

You acquired shares in Company X while you were an Australian resident and also while you were a non-resident.

Company X supplies various business consulting services and is not a landholding entity.

The shares in Company X were not ‘taxable Australian property’ at the time you acquired them.

You entered into a shareholder agreement with Company X.

You were made redundant from your employment position.

As part of your redundancy, you disposed of your shareholding as required by the shareholder agreement.

You made a capital gain on the disposal of the shares which was taxed in Country X.

You were a tax resident of Country X at the time of your redundancy.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 subsection 104-165(2)

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

International Tax Agreements Act 1953

Reasons for decision

You acquired shares in Company X while you were a tax resident of Australia and also after you ceased to be a tax resident of Australia.

If a taxpayer ceases to be an Australian resident, CGT event I1 in section 104-160 of the Income Tax Assessment Act 1997 (ITAA 1997) is triggered. The taxpayer is taken to have disposed of all their CGT assets (except those that are taxable Australian property):

● at the time the taxpayer ceases to be a resident, and

● for their market value at that time.

Taxable Australian property includes direct or indirect interests in Australian real property, CGT assets used in carrying on a business in Australia and mining, quarrying or prospecting rights to minerals, petroleum or quarry materials situated in Australia (section 855-15 of the ITAA 1997)

However, an individual taxpayer has a choice to disregard the gain made from CGT event I1 (subsection 104-165(2) of the ITAA 1997). The consequence of the choice being made is that each CGT asset is then deemed to be taxable Australian property until the earlier of:

● a CGT event happening which results in the disposal of the asset, or

● the taxpayer again becoming a resident.

In your case, as CGT event I1 did not happen at the time you ceased to be an Australian resident, you effectively disregarded the event. This means that the shares you had acquired up to the point of non-residency were taken to be taxable Australian property until you disposed of them. However, the shares you acquired when you were a foreign resident were not taken to be taxable Australian property.

CGT event A1 in section 104-10 of the ITAA 1997 occurs on the disposal of a CGT asset. However, a foreign resident can disregard a capital gain or loss in relation to an asset that is not taxable Australian property (section 855-10 of the ITAA 1997).

Therefore, you are able to disregard the capital gain you made from the disposal of the shares that were not taxable Australian property but are unable to disregard the capital gain from the shares that were taken to be taxable Australian property.

Consequently, the capital gain from the shares that were taken to be taxable Australian property is subject to income tax in Australia under domestic income tax law.

However, in determining liability to tax on income and capital gains, it is necessary to consider not only the domestic income tax laws but also any applicable double tax agreement.

Section 4 of the International Tax Agreements Act 1953 (Agreements Act) incorporates that Act with the Income Tax Assessment Act 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).

The double tax agreement between Australia and Country X (the Country X agreement) is listed in the Agreements Act and operates to avoid the double taxation of income received by residents of Australia and Country X

Article 13 of the Country X agreement deals with the alienation (disposal) of property and paragraphs 1 to 4 of the Article deal with the alienation of:

1. real property,

2. business property of a permanent establishment,

3. ships or aircraft, and

4. shares or comparable interests deriving more than 50% of their value directly or indirectly from real property.

Paragraph 5 of the Article provides that gains of a capital nature from the alienation of any property, other than that referred to in the preceding paragraphs, will be taxable only in the country of which the alienator is a resident.

In your case, the shares you held in Company X were not covered by paragraphs 1 to 4 of the Article, therefore, paragraph 5 applies so that the capital gain you made on the disposal of the shares will only be taxed in the country in which you were a resident at the time of the disposal, that is, Country X.

Consequently, Article 13(5) of the Country X agreement overrides Australian domestic income tax law so that the full capital gain from the sale of your shares in Company X is not subject to income tax in Australia