Edited version of private advice

Authorisation Number: 1052230630258

Date of advice: 14 March 2024

Ruling

Subject: Capital Gains Tax (CGT)

Question

Do I have a capital loss of $XXXX under subsection 104-10(4) of the Income tax Assessment Act 1997 (ITAA 1997) for the sale of my property in India in the income year ended 30 June 20YY?

Answer

Yes

This ruling applies for the following period:

1 July 20XX to 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

This private ruling is based on the facts and circumstances set out below. If your facts and circumstances are different from those set out below, this private ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

You are an Australian citizen and an Australian resident for tax purposes.

You are also considered an overseas citizen of Country A as determined by the Country A Tax Department .

You inherited a piece of land located at xx in Country A together with your xx from your parents.

The house that was on that land was demolished, you and your xx jointly constructed a new building on that land.

The available floor space in the building was divided between you and your xx as specified in the family agreement signed by you and your xx.

You sold your floor space of the building (the Property) on xx xx 20xx.

Treatment of the sale of the Property in Country A

You were considered an overseas citizen by the Country A Tax Department.

As a result, a specified amount of Country A currency was deducted from the sale price of the Property and paid to the Country A Tax Department, for CGT purposes pursuant to the Country A income tax laws.

After the submission of your income tax return to the Country A Tax Department with the details of the sale of the Property, under the Country A income tax system, it was deemed a capital loss occurred upon the sale of the Property. The amount that was deducted as part of the sale process was refunded back to you.

Treatment of the sale of the Property in Australia

You provided the following information for the capital gains tax (CGT) calculation required in Australia for your Australian taxation obligations:

•        You inherited the property from your parents on xx xx 20xx when the market value in Country A was xx.

•        The market value on xx xx 20xx was AUD $xx.

•        The property was sold on xx xx 20xx for xx in Country A currency.

•        The sale proceeds on xx xx 20xx were AUD $xx.

•        You demolished a significant portion of the property. You incurred demolition cost of xx. The value of the demolition costs in AUD was $xx.

•        Construction costs incurred to construct the new building on the property was xx. The value of the new building in AUD was $xx.

You do not have any records of incidental costs such as legal fees, stamp duty, valuation fees, or any transferring fees to include in the cost base.

You intend to calculate your cost base for the property by adding the market value of the inherited property, plus demolition fees, plus construction fees.

For an amount paid in a foreign currency that is part of the cost base such as, the demolition fees and the construction fees, you have converted it to Australian currency at the time of the event.

This gives the following reduced cost base for the purposes of section 110-55 of the ITAA 1997:

Total reduced cost base = $xx + xx + xx

Total reduced cost base = $xx

You intend to calculate your capital loss pursuant to subsection 104-10(4) of the ITAA 1997 by the extent that the capital proceeds are less than the property's reduced cost base. This gives the following:

Capital loss = $xx - $xx

Capital loss = -$xx

You intend to claim the capital loss of $xx in your 20YY income tax return.

Further issues for you to consider

Please note that records are required to be kept for CGT purposes. Section 100-65 of the ITAA 1997 provides the types of records you should keep including receipts of transfer, any market valuations, costs of repairs maintenance and construction, any legal costs. Section 100-70 of the ITAA 1997 states these should be kept for 5 years after a CGT event has happened.

We note that you did not provide any other incidental costs. Please note if you wanted to take these into consideration and were able to substantiate further incidental costs you may, within the period of review, ask the Commissioner to amend your tax return accordingly.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-10

Income Tax Assessment Act 1997 subsection 104-10(4)

Income Tax Assessment Act 1997 section 102-5

Income Tax Assessment Act 1997 section 102-10

Income Tax Assessment Act 1997 section 110-55

Does Part IVA apply to this private ruling?

Does Part IVA apply to this private ruling? Part IVA of the Income Tax Assessment Act 1936 contains anti-avoidance rules that can apply in certain circumstances where you or another taxpayer obtains a tax benefit, imputation benefit or diverted profits tax benefit in connection with an arrangement. If Part IVA applies, the tax benefit or imputation benefit can be cancelled (for example, by disallowing a deduction that was otherwise allowable) or you or another taxpayer could be liable to the diverted profits tax. We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part. If you want us to rule on whether Part IVA applies, we will need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply. For more information on Part IVA, go to our website ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

These reasons for decision accompany the Notice of private ruling for xx.

This is to explain how we reached our decision. This is not part of the private ruling.

Question

Summary

Yes, you have made a capital loss of $xx for the sale of the property in Country A in the income year ended 30 June 20YY under subsection 104-10(4) of the Income tax Assessment Act 1997 (ITAA 1997).

Detailed reasoning

CGT Provisions

CGT event A1 in section 104-10 of the ITAA 1997, relating to the disposal of a CGT asset, will happen when you dispose of property. You will make a capital gain if the capital proceeds from the disposal of the property are more than the cost base. You will make a capital loss if those capital proceeds are less than the reduced cost base of the property.

The capital loss can be taken into account in calculating you net capital gain or you net capital loss for the 20YY income year. Section 102-5 of the ITAA 1997 contains a separate five step method statement for working out a net capital gain. Section 102-10 of the ITAA 1997 contains a separate three step method statement for working out a net capital loss.

Application to your circumstances

In Australia, the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules for CGT, which apply when you sell assets like property. When you sell an asset, you incur a capital gain if the sale proceeds exceed the cost base (acquisition and improvement costs). Conversely, you incur a capital loss if the sale proceeds are less than the cost base.

As an Australian resident for tax purposes, you inherited a property in Country A with your x. While the Country A authorities refunded you the full tax amount of Country A currency xx, Australia still considers the sale relevant for CGT purposes under the Australian taxation system.

You have provided the information to calculate your cost base of the property and your sale proceeds. Based on the information provided, the reduced cost base has exceeded your sale proceeds, and the CGT calculation indicates that you have incurred a capital loss of $xx.

Capital Loss

A net capital loss for an income year arises where all the capital losses made in that income year exceed all the capital gains made in that income year. Where a net capital loss arises, to the extent that a net capital loss cannot be used to offset capital gains in an income year, it can be carried forward to a subsequent income year to be used to offset against any future capital gains.

However, a net capital loss cannot be deducted from a taxpayer's assessable income, nor can it be carried back to prior financial years.

There is also no discretion in this legislation to treat a net capital loss as being assessable in any other financial year.