Edited version of private advice

Authorisation Number: 1051766124331

Date of advice: 12 October 2020

Ruling

Subject: Capital losses

Question 1

Does Article 13(5) of the United Kingdom Convention apply to capital losses generated as a result of CGT event C2 happening?

Answer

No.

Question 2

Can a capital loss be claimed under subsection 104-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of CGT event C2 happening on the expiry of the options?

Answer

Yes.

This ruling applies for the following periods:

Year ending 30 June 20XX

The scheme commences on:

1 March 20XX

Relevant facts and circumstances

Background Facts

An individual taxpayer acquired unlisted options to purchase ordinary shares in two Australian Stock exchange (ASX) listed companies.

The abovementioned options are CGT assets under section 108-5 of the ITAAA 1997.

The taxpayer became a foreign resident for Australian income tax purposes in 20XX.

Taxpayer stops being an Australian resident

As the taxpayer stopped being an Australian resident in 20XX, CGT event I1 occurred under section 104-160 of the ITAA 1997.

Under subsection 104-165(2), the taxpayer chose to disregard making a capital gain or capital loss in respect of the options.

The options were not 'taxable Australian property' as referred to in subsection 104-160(3) prior to the exercise of the taxpayer's choice under subsection 104-165(2).

Subsequent disposal

The options expired in 2019 for which the taxpayer received no consideration. This caused CGT event C2 under section 104-25 to happen at that date. This generated a capital loss for the 20XX income year. The taxpayer was a non-resident at that time.

The taxpayer derived no capital gains during the 20XX income year.

Relevant legislative provisions

Subsection 104-25(1) of the ITAA 1997

Subsection 104-160(1) of the ITAA 1997

Subsection 104-165(2) of the ITAA 1997

Subsection 104-165(3) of the ITAA 1997

Subsection 995-1(1) of the ITAA 1997.

Article 13(5) of the UK/Australia DTA

Section 4 of the International Tax Agreements Act 1953 (Cth)

Section 5 of the International Tax Agreements Act 1953 (Cth)

Reasons for decision

Question 1

Does Article 13(5) of the United Kingdom Convention apply to capital losses generated as a result of CGT event C2 happening?

Summary

The United Kingdom convention does not apply to capital losses generated as a result of CGT event C2 happening.

Detailed reasoning

Section 104-160 contains the rules dealing with CGT event I1, and provides as follows:

104-160- Event I1- Individual or company stops being an Australian resident

CGT event I1 happens if you stop being an Australian resident.

The time of the event is when you stop being one.

You need to work out if you have made a *capital gain or a *capital loss for each *CGT asset that you owned just before the time of the event, except one that is *taxable Australian property:

(a) covered by item 1 or 3 of the table in section 855-15 ; or

(b) covered by item 4 of that table because it is an option or right to *acquire a *CGT asset covered by item 1 or 3 of that table

Exception under 104-165

Section 104-165 provides as follows:

If you are an individual, you can choose to disregard making a *capital gain or a *capital loss from all *CGT assets covered by *CGT event I1.

If you do so choose, each of those assets is taken to be *taxable Australian property until the earlier of:

Note:

If you are an individual who was in Australia on 6 April 2006, and you remain an Australian resident from that day until you stop being one, and you were an Australian resident for less than 5 years during the 10 years before you stopped being one, see section 104-166 of the Income Tax (Transitional Provisions) Act 1997

When the taxpayer became a non-resident of Australia in 20XX, they made a choice under subsection 104-165(2) to disregard a capital gain or loss made in respect of the options covered by CGT event I1.

When the options expired in 20XX, a CGT event occurred on the dates of expiry.

The operation of Article 13(5) of the UK Convention

From the facts provided, a capital loss was incurred as a result of the expiry of the options. At the time the options expired, the taxpayer was a resident of the UK.

Article 13(5) of the UK Convention provides an exemption from taxation in the former country of residence (Australia) if the individual taxpayer elected to defer taxation where the income or gains were derived as a result of the alienation of property.

The article provides:

An individual who elects, under the taxation law of a Contracting State , to defer taxation on income or gains relating to property which would otherwise be taxed in that State upon the individual ceasing to be a resident of that State for the purposes of its tax, shall, if the individual is a resident of the other State , be taxable on income or gains from the subsequent alienation of that property only in that other State.

Effectively, if the taxpayer made a choice under subsection 104-165(2) and stopped being an Australian resident to become a resident of the UK, when a CGT event subsequently occurs, Article 13(5) of the UK/Australia DTA would apply such that the income or gains would be assessed under the relevant UK Taxation laws.

The taxpayer became a non-resident but made a choice under subsection 104-165(2) to disregard the capital gain or loss that would have crystalized at that time. The options subsequently expired generating capital losses.

The Commissioner's view is that Article 13(5) of the UK Convention has no application to the facts of this case.

It follows that the matter of the capital loss that has arisen in this case falls to be determined in accordance with Australian tax laws; and in particular the CGT provisions under ITAA 1997.

Question 2

Can a capital loss be claimed under subsection 104-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of CGT event C2 happening on the expiry of the options?

Summary

A capital loss can be claimed under subsection 104-25(3) of the Income Tax Assessment Act 1997 (ITAA 1997) as a result of CGT event C2 happening on the expiry of the options.

Detailed reasoning

Upon the exercise of the choice by the taxpayer under subsection 104-165(2), the relevant options were taken to be 'taxable Australian property' pursuant to subsection 104-165(3); and remained so until the time at which CGT event C2 happened in relation to them, being the time at which they expired: section 104-25 and paragraph 104-165(3)(a).

It is taken as facts in this case that:

·         the options expired in the 20XX income year; and

·         the taxpayer made a capital loss in respect of the expiry of the options, pursuant to the application of subsection 104-25(3) of the ITAA 1997.

For the reason that Article 13(5) of the UK Convention has no application to the facts of this case, these capital losses will be taken into account in the taxpayer's return and assessment for the relevant year.