Edited version of private advice

Authorisation Number: 1051686770597

Date of advice: 4 June 2020

Ruling

Subject: Income tax

Question 1

Can the capital gain be disregarded under section 855-10 of the ITAA 1997?

Answer

No, the gain is assessable.

Question 2

If the gain is assessable, will the Taxpayer be able to apply the provisions of Income Tax Assessment Act 1936 (ITAA 1936) Schedule 2D Subdivision 57-E and treat the cost base of the property as the adjusted taxable value at the time the Taxpayer lost its exempt income status?

Answer

No

Question 3

If so, what valuation method will the Commissioner accept to establish the historical market value of the property as at the time the Taxpayer lost its exempt income status?

Answer

N/A

The value to be used is the capital proceeds received from the sale of the property in 2019.

Question 4

Does the cost base of the real property include the cost of sale, including legal fees in accordance with section 110-25of the ITAA 1997?

Answer

Yes

This ruling applies for the following period

1 July 2018 to 30 June 2019

The scheme commences on:

1 July 2018

Relevant facts and circumstances

1. The Taxpayer has never been issued with an Australian Tax File Number or an Australian Business Number (ABN) and it is not registered as a charity with the ACNC.

2. The taxpayer is a religious charitable organisation which is registered as tax exempt in an overseas country.

3. As a religious institution, prior to the introduction of the Australian Charities and Not-for Profits Commission (ACNC) on 3 December 2012, the entity self-assessed its entitlement to tax concessions in Australia.

4. For many years the organisation has not carried on business in Australia. It has however, held a remainder interest in an Australian real property.

5. On the death of the life estate tenant, the entity gained unencumbered ownership of the property, of which it disposed by way of Contract of Sale.

6. The net proceeds of this sale were gifted by the Taxpayer to another Australian charity with common objectives registered with the ACNC.

Relevant legislative provisions

Section 50-5 of the ITAA 1997

Section 50-50 of the ITAA 1997

Section 110-25 of the ITAA 1997

Section 855-10 of the ITAA 1997

Section 855-20 of the ITAA 1997

Reasons for decision

Question 1

The CGT provisions generally apply to capital gains or losses made by a taxpayer from the "disposal" of an asset that was acquired on or after 20 September 1985.

According to section 104-10, CGT event A1 happens when a taxpayer disposes of a CGT asset.

The time of the CGT event is when the disposal contract is entered into or, if there was no disposal contract, when the entity stops being the asset's owner.

Under section 855-10, Foreign Residents will only recognise a capital gain or loss where the CGT event happens in relation to certain specified assets known as taxable Australian property.

Section 855-15 lists five categories of *CGT assets that are taxable Australian property, including Item 1: *taxable Australian real property, as defined in section 855-20. Section 855-20 defines taxable Australian real property to include real property situated in Australia.

The entity is a foreign resident Country A entity and article 13.7 of the relevant convention allows a contracting country to tax the gain from the alienation of real property situated in Australia.

As per section 116-20, the amount of the capital proceeds is generally the sum of the money received or receivable in respect of the CGT event occurring.

In this case, there has been a disposal of real property by contract of sale and the whole of the capital gain is brought to account in the year of the CGT event occurring; in this case 2019.

Question 2

The entity self-assessed as exempt from tax under paragraph 23(e) of the ITAA 1936 as a religious institution. The section states as follows:

the income of a religious, scientific, charitable or public educational institution which:

(i) has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia; or

(ii) is an institution to which a gift by a taxpayer is an allowable deduction because the institution is referred to in a table in subsection 78(4); or

(iii) is a prescribed institution which is located outside Australia and is exempt from income tax in the country in which it is resident; or

(iv) is a prescribed charitable or religious institution that has a physical presence in Australia but which incurs its expenditure and pursues it objects principally outside Australia;

This subsection was subsequently replaced by section 50-5 of the Income Tax Assessment Act 1997 (ITAA 1997).

The entity does not and never has satisfied paragraph 50-50(a) of the ITAA 1997.

Paragraph 50-50(a) of the ITAA 1997 provides special conditions for item 1.1:

An entity covered by item 1.1 is not exempt from income tax unless the entity:

(a) Has a physical presence in Australia and, to that extent, incurs its expenditure and pursues its objectives principally in Australia.

The incurring of expenditure and pursuit of objectives must be principally in Australia.

The entity has never been endorsed as a charity and it is not a "registered charity" with the ACNC. It does not satisfy the purposes of Item 1.1 of the table in section 50-5 of the ITAA 1997.

Division 57 of Schedule 2D of the ITAA 1936 will not apply.

(i) Section 57-5 states:

"If:

(a) at a particular time, all of the income of a taxpayer is wholly exempt from income tax; and

(b) immediately after that time, the taxpayer's income becomes to any extent assessable income;

then:

(c) the taxpayer is a 'transition taxpayer'; and

(d) the time when the taxpayer's income becomes to that extent assessable is the 'transition time'; and

(d) the year of income in which the transition time occurs is the 'transition year' for the taxpayer." and

(e) the year of income in which the transition time occurs is the transition year for the taxpayer.

Section 57-5 (a) is not satisfied by the taxpayer because in the period when it owned the real property it was not exempt from Australian income tax.

Question 3

Not applicable.

Question 4

Subsection 110-25(1) of the ITAA 1997, provides that there are five elements to a cost base.

First element:subsection 110-25(2), the acquisition cost

Second element: incidental costs 110-25(3), these costs include:

·        professional fees including the remuneration for the services of a surveyor, valuer, auctioneer, accountant, broker, agent, consultant or legal adviser

·        costs of transfer

·        stamp duty and other similar duty

·        costs of advertising or marketing (but not entertainment) for a buyer or seller

·        valuation or apportionment costs

·        search fees relating to a CGT asset (such as fees to check land titles and similar fees, but not travel costs to find an asset suitable to purchase)

·        the cost of a conveyancing kit (or similar cost)

·        borrowing expenses (such as loan application fees and mortgage discharge fees).

Under subsection 110-25(4), the costs of ownership can only be included in the third element of the cost base of the CGT asset where the CGT asset was acquired under a contract entered into on or after 21 August 1991.

Under subsection 110-25(5) the fourth element of the cost base consists of expenditure incurred to:

·        preserve or increase the value of the asset, or

·        to install or move the asset.

Under subsection 110-25(6) the fifth element of the cost base is capital expenditure incurred to establish, preserve or defend the taxpayer's title to the asset, or a right over the asset.