Edited version of private advice

Authorisation Number: 1052214150091

Date of advice: 23 January 2024

Ruling

Subject: Capital loss on sale of overseas property

Question 1

Is the capital loss made on the sale of the overseas property included in your Australian income tax return for the income year ended 30 June 20XX under subsection 6-10(4) of the Income Tax Assessment Act 1997?

Answer

Yes.

Question 2

Is the first element of the cost base and reduced cost base of the overseas property its market value under subsection 768-955(2) of the Income Tax Assessment Act 1997 on the date you ceased to be a temporary resident and became a permanent resident of Australia?

Answer

Yes.

Question 3

Does the market valuation of the overseas property satisfy the market value requirement in subsection 768-955(2) of the Income Tax Assessment Act 1997?

Answer

Yes.

This ruling applies for the following period:

Year ended 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australian resident for tax purposes.

You first arrived in Australia on temporary working visa in 20XX.

You were granted a permanent resident visa in 20XX.

You became an Australian citizen in 20XX.

You own investment properties overseas which you acquired after 20 September 1985.

All properties have been renovated with the purpose to sell with capital gain.

None of the properties have been rented out to protect their condition for the future sales.

You decided to sell all your overseas investment properties.

During the 20XX income year you sold one of your investment properties (the property).

You made a capital loss on the sale of the property.

You engaged the services of an overseas valuer to prepare the market valuation of the property on the date you ceased to be a temporary resident and became a permanent resident of Australia.

You selected the valuer on their reputation as the most recognised valuer in the overseas country from the standpoint of federal licensing and compliance with International Valuation standards as a member of the International Valuation Standards Council (VSC).

You issued written instruction to the valuer in a letter of engagement.

The valuer produced a valuation report supported by objective and accurate evidence, addressing the information recommended in the ATO publication Market valuation for tax purposes.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subsection 6-10(4)

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 section 108-5

Income Tax Assessment Act 1997 section 768-955

Income Tax Assessment Act 1997 subsection 768-955(2)

Income Tax Assessment Act 1997 subsection 121-20(1)

Income Tax Assessment Act 1997 subsection 121-20(2)

Reasons for decision

Question 1

Summary

The capital loss you made on the sale of the overseas property is included in your Australian income tax return for the income year ended 30 June 20XX.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Subsection 6-10(4) states that if you are an Australian resident, your assessable income includes your statutory income from all sources, whether in or out of Australia. Statutory income includes capital gains.

Your net capital gain is the total of your capital gains for the income year, reduced by certain capital losses you have made.

You make a capital gain or loss only if a CGT event happens.

Under section 104-10, CGT event A1 happens if you dispose of a CGT asset.

The overseas property meets the definition of a CGT asset in section 108-5.

During the 20XX income year you sold the overseas property and made a capital loss on the sale.

As you had become an Australian resident during the 20XX income year the capital loss you made on the sale of the property is included in your Australia income tax return for the year ended 30 June 20XX.

You can use a capital loss to reduce capital gains only, in the current income year or in later income years.

Question 2

Summary

The first element of the cost base and reduced cost base of the property is its market value on the date you ceased to be a temporary resident and became a permanent resident of Australia.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Subsection 768-955(1) states that if you are a temporary resident and you then ceaseto be a temporary resident (but remain, at that time, an Australian resident), there are rules relevant to each CGT asset that:

a)    you owned just before you ceased to be a temporary resident; and

b)    is not taxable Australian property; and

c)    you acquired on or after 20 September 1985.

Subsection 768-955(2) contains the rule that the first element of the cost base and reduced cost base of the asset (at the time you cease to be a temporary resident) is its market value at that time.

In your case, the property is subject to this rule as you owned it just before you ceased to be a temporary resident; it is not taxable Australian property; and you acquired it on or after capital gains tax was introduced on 20 September 1985.

Accordingly, the first element of the cost base and reduced cost base of the property is its market value on the date you ceased to be a temporary resident and became a permanent resident of Australia.

When a CGT event happens to a CGT asset and you haven't made a capital gain, you need the asset's reduced cost base to work out whether you have made a capital loss. See our webpage Cost base of assets (QC 66022) for information about the five elements of the cost base and reduced cost base.

Question 3

Summary

The market valuation of the property prepared by the valuer satisfies the market value requirement in subsection 768-955(2) of the Income Tax Assessment Act 1997.

Detailed reasoning

All legislative references are to the Income Tax Assessment Act 1997.

Under subsection 768-955(2), the first element of the cost base and reduced cost base of the property is its market value on the date you ceased to be a temporary resident and became a permanent resident of Australia.

Market value generally takes its ordinary meaning for tax purposes.

Our publication Market valuation for tax purposes (the Guide) includes information on the evidence and processes we generally expect to see to support a valuation.

The International Valuation Standards Council (IVSC) is acknowledged in the Guide as the independent global standard setter for the valuation profession and sets International Valuation Standards (IVS) that promote consistency and professionalism in the public interest.

The Guide states that depending on the purpose and the type of asset, a valuation that adopts and follows professional standards can add credibility to an estimate of market value.

You engaged the services of the valuer to prepare the market valuation of the property.

You selected the valuer on their reputation as the most recognised valuer in the overseas country from the standpoint of federal licensing and compliance with International Valuation standards as a member of the International Valuation Standards Council (VSC).

The valuer produced a valuation report supported by objective and accurate evidence, addressing the information recommended in the Guide.

We consider that the market valuation prepared by the valuer satisfies the market value requirement in subsection 768-955(2).