Edited version of private advice

Authorisation Number: 1051881809766

Date of advice: 09 August 2021

Ruling

Subject: Temporary resident - CGT asset

Question 1: Is the payment you received as a result of the Buy-Back assessable under section 6-5 of the Income Tax Assessment Act (ITAA 1997)?

Answer: No. However, it will be subject to the capital gains tax provisions contained in Parts 3-1 or 3-3 of the ITAA 1997 because it is a capital receipt.

Question 2: Are you entitled to disregard any capital gain made in relation to the Buy-Back payment?

Answer: Yes. You can disregard any capital gain made arising in relation to the Buy-Back payment, as you were a temporary resident when you received the payment and it was received in relation to non-taxable Australian property.

Question 3: Will the Coupon interest payments you received in relation to the Investment be assessable as ordinary income under section 6-5 of the ITAA 1997?

Answer: Yes. As these payments were Australian sourced while you were a temporary resident, they will be assessable in the income year they were received under paragraph 768-910(1)(a) of the ITAA 1997.

This ruling applies for the following period

Income year ending 30 June 20XX.

The scheme commences on

1 July 20XX.

Relevant facts and circumstances

Background

You came to Australia on a Business Skills (Provisional) (class EB) Business Innovation and Investment (Provisional) (subclass 188) visa for the period of four years.

You obtained a bridging B visa for an additional period of time.

You were a temporary resident during the period covered by this ruling.

The Investment

You received an of offer to participate in a Deferred Purchase Agreement with loan (the Investment) being offered to Australian residents for taxation purposes.

You accepted the offer to participate in the Investment and received XXX,XXX Units purchased for $X per unit, entering into the loan arrangement and prepaying an amount of interest.

The Master Product Disclosure Statement (Master PDS) issued in relation to the Investment included the following information:

•                 This Master PDS is for the offer of an agreement to purchase the shares (Delivery Assets) specified in the relevant Term Sheet PDS on certain terms including deferred delivery and entry into a Loan for the Investment Amount (the Offer).

•                 Company X, an Australian company, is the Issuer who would notify the Australian Securities and Investments Commission that this PDS is in use in accordance with the Corporations Act.

•                 The Offer is only available to Australian resident investors in Australia and the Units would not be registered under a specified foreign countries legislation and may not be offered or sold in the foreign country, or to, or for the benefit of resident of that country unless the Units were registered under the countries legislation

•                 Units in the Investment meant an agreement to buy the Delivery Assets between the Issuer, Custodian and the investor pursuant to the Deferred Purchase Agreement. The Units are not units in a trust or managed investment scheme.

•                 The Units are interests in Deferred Purchase Agreement issued by the Issuer and on Settlement Date the Investor would receive a Delivery Parcel which has a value equivalent to the Final Value at the Maturity Date

•                 Some series may pay Coupons, either during the Investment Term or at Maturity of both and any coupon payment received should be characterised as ordinary income and should be included in the Investor's assessable income in the income year in which it is received by the Investor.

•                 If an Investor does not have the intention of holding the Unit, and Delivery Assets that they may acquire, for capital purposes, then an Investor may be required to treat any gain or loss made on revenue account rather than capital account.

•                 An Investor may request the Issuer to buy back their Units which if accepted by the Issuer will require the repayment of the Loan on the Early Maturity Date and if not the Early Maturity Value (or Termination Payment) will be applied towards repayment of the Loan. Settlement of an Issuer Buy-Back will take place by application of the Buy-Back Price to any amount outstanding on the Loan on the Buy-Back Date. The Buy-Back Price less the amount used to repay the Loan amount will be paid to the Investor in cash.

The Term Sheet Product Disclosure Statement issued in relation to the Investment included the following information:

•                 Specified Coupon determination dates and the final Coupon determination date

•                 A specified maturity date for the Investment; and

•                 Information about the Buy-Back dates, advising that the Buy-Back will ever only be $X per unit and will be applied to repay the Loan. However, will not have to pay any other fees, costs or interest.

Company A sent you several statements in relation to Coupon payments in relation to the Investment over the period of two income years.

You decided not to keep the Units to maturity and lodged a request for an early Investor directed Issuer Buy Back.

Company A sent you a letter in relation to your Issuer Buy-Back request indicating that as you had not repaid the Loan by the Issuer Buy-Back date, the proceeds from the Buy-Back had been applied to repay the Loan and that you would receive a Buy-Back payment of $XX,XXX.

You received the Buy-Back payment during the period covered by this ruling.

Assumptions

For the purposes of this ruling the following assumptions have been made:

•                 You were not carrying on a business of trading in equity or debt securities; and

•                 You acquired the Units on capital account for the purpose of holding them long term.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 6-5

Income Tax Assessment Act 1997 section 768-910

Income Tax Assessment Act 1997 section 768-915

Income Tax Assessment Act 1997 Part 3-1

Income Tax Assessment Act 1997 Part 3-3

Reasons for decision

Temporary residents

The taxation treatment of ordinary income and capital gains by temporary residents of Australia is discussed below:

Income derived by temporary residents

Section 768-910 of the ITAA 1997 provides that ordinary income derived from a foreign source (excluding employment related income and capital gains on shares and rights acquired under employee share schemes) is exempt from income tax in Australia when derived by a temporary resident in Australia.

The following ordinary and statutory income derived by a temporary resident from a source other than an Australian source will be non-assessable non-exempt income under section 768-910 of the ITAA 1997:

•                 ordinary income derived directly or indirectly from a source other than an Australian source by a person who is a temporary resident when the income is derived, or

•                 statutory income, other than a net capital gain, derived from a source other than an Australian source by a person who is a temporary resident when the income is derived.

However, temporary residents and foreign residents of Australian are generally taxed on their Australian-sourced income and there is no exemption.

Subsection 6-5(3) of the ITAA 1997 states that if you are a foreign resident, your assessable income includes:

a)               all ordinary income you derived directly or indirectly from all Australian sources during the income year; and

b)               other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source.

Capital gains and losses made by temporary residents

Capital gains or capital losses that a temporary resident makes from a capital gains tax (CGT) event are disregarded in certain circumstances. The exemption applies where a capital gain or capital loss would not have been made if the temporary resident had been a foreign resident when or immediately before the CGT event occurred.

Subsection 768-915(1) of the ITAA 1997 states that any capital gain or capital loss you make from a CGT event will be disregarded if:

a)               you are a temporary resident when, or immediately before the CGT event occurred; and

b)               any capital gain or capital loss would have been disregarded under Division 855 of the ITAA 1997 if you were a foreign resident when, or immediately before, the CGT event happens.

Subsection 855-10(1) of the ITAA 1997 states that you can disregard a capital gain or capital loss from a CGT event if:

a)               you are a foreign resident just before the CGT event happens; and

b)               the CGT event happens in relation to a CGT asset that is not taxable Australian property.

This means that only a limited range of capital gains or losses will be considered for Australian tax purposes by temporary residents and they will be treated as if the temporary resident were a foreign resident.

Application to your situation

You participated in the Investment that was offered by an Australian company, being Company X in its role as the Issuer.

Under the Investment you acquired Units, being an agreement to buy the Delivery Assets between the Issuer, Custodian and the investor pursuant to the Deferred Purchase Agreement. If the Investment went to maturity you would have received the Delivery Assets, being shares. in a specified Australian company.

You intended to keep the Units, and Delivery Assets, on capital account as an investor. However, you requested the Issuer to buy back your Units prior to the maturity date and had received the Buy-Back payment.

During the period of the Investment you received several Coupon payments.

We have considered the taxation implications on your receipt of the Coupon interest payments and Buy-Back payment as follows:

Coupon interest payments

Prior to requesting the Buy-Back, you had received Coupon payments over two income years.

Taxation Determination TD 2008/21 Income tax: is a Deferred Purchase Agreement warrant, an investment product offered by financial institutions, a traditional security for the purposes of sections 26BB and 70B of the Income Tax Assessment Act 1936? states at subparagraph 11(b) that investors may receive a right under the DPA warrant to receive coupon payments during the investment period, with coupon payments being assessable under section 6-5 of the ITAA 1997.

The Master PDS outlines that any Coupon payment received should be characterised as ordinary income and should be included in the investor's assessable income in the income year in which it is received by the investor.

The Coupon payments were paid to you by Company X as the Issuer of the Investment, which is an Australian company. It is therefore viewed that the Coupon payments were Australian sourced income for you.

Therefore, while you were a temporary resident when you received the Coupon payments, as they are Australian sourced income, they are viewed as being assessable income for you under section 6-5 of the ITAA 1997 in the income years in which you received them.

Buy-Back payment

The Master PDS states that the Units are interests in Deferred Purchase Agreement (DPA). TD 2008/21 outlines that a DPA is not a traditional security and that any gain or loss on the DPA warrant would generally be on capital account for an investor, but would be on revenue account where the transaction was entered into as part of the carrying on of a business or a profit-making undertaking.

Taxation Determination TD 2008/22 Income tax: capital gains: does CGT event C2 happen as a result of the satisfaction of an investor's rights under a Deferred Purchase Agreement warrant, an investment product offered by financial institutions, by the delivery of the Delivery Assets? states that the rights of an investor under a DPA are legally enforceable rights and therefore, in their totality, and are a CGT asset according to the definition in subsection 108-5(1) of the ITAA 1997. CGT event C2 occurs when an investor receives the Delivery Assets and their ownership in the DPA warrants comes to an end due to the rights being discharged or satisfied under subsection 104-25(1) of the ITAA 1997.

In accordance with the Master PDS, and the principles contained in TD 2008/21 and TD 2008/22, it is viewed that Units are CGT assets and as you were an investor you held them on capital account.

While you did not hold the Units until their maturity, but had chosen to receive an early cash payout as a result of your Buy-Back request, it is viewed that CGT event C2 is the most relevant CGT event to have occurred in relation to the Buy-Back as you had not transferred your ownership in them to any other entity.

Therefore, as the Units were held on capital account, any gain or loss you made on the end of your ownership interest in them is assessable under the CGT provisions unless an exemption applies to enable you to disregard the gain or loss.

As you were a temporary resident when the CGT event in relation to the Buy-Back occurred, and the Units were not Australian taxable property, you can disregard any capital gain or loss made on the disposal of the Units under section 768-915 of the ITAA 1997.

Conclusion

Based on the information provided with this ruling:

•                 The Coupon interest amounts you received in relation to the Investment are assessable ordinary income as they are Australian sourced, and were assessable in the income years in which they were received; and

•                 You can disregard any capital gain made in relation to the receipt of the Buy-Back payment as you were a temporary resident when you received the payment and the payment was not in relation to taxable Australian property.