Edited version of private advice

Authorisation Number: 1052242486868

Date of advice: 28 May 2024

Ruling

Subject: Distributions from a foreign trust

Question 1

Is the Fund (the Fund) or any of the subsidiary accounts considered to be a foreign superannuation fund as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Question 2

Is the lump sum payment made from a scheme for the payment of benefits in the nature of superannuation upon retirement or death that satisfies the conditions set out in subsection 305-55(2) of the ITAA 1997?

Answer

No.

Question 3

Is any part of a lump sum payment to be transferred from the Fund applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

No.

Question 4

Is any part of the lump sum payment from the Fund assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Question 5

If the answer to question 4 is yes, are the government contributions to the Fund excluded by paragraph 99B(2)(a) of the ITAA 1936?

Answer

No.

Question 6

Is the sale of your property subject to Capital Gains Tax (CGT)?

Answer

Yes.

Question 7

If the answer to question 6 is yes, are you eligible to apply a full main residence exemption on the sale of the property?

Answer

No.

Question 8

If the answer to question 7 is no, are you eligible to apply a partial main residence exemption on the sale of the property?

Answer

Yes.

Question 9

Can you include the full amount paid into the Fund in the cost base of the property?

Answer

No.

Question 10

Will the full amount contributed to the Fund from the sale of the property including accrued interest be excluded under paragraph 99B(2)(a) of the ITAA 1936?

Answer

No

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

1 July 20XX

Relevant facts and circumstances

You are an Australia tax resident.

You started living in Australia from XX XXXX XXXX and became an Australian tax resident from this date.

The Fund

Prior to living in Australia, you lived and worked in Country X.

You are a member of the foreign Fund (the Fund).

Whilst you were living and working in Country X, you and your employer made contributions to the Fund, along with amounts paid by the Country X Government.

The Fund is established under Country X legislation.

The Board acts as trustee of the Fund.

Legislation provides that the Board of the Fund must pay to a member of the Fund interest on the amount standing to the credit of the member in the Fund at such intervals and at such time as the Fund may determine.

This represents the government contributions to the Fund.

The interest rates mentioned are independent of actual market returns.

In 20XX, the Fund contributed $X to your Fund accounts. In 20XX they contributed $X to your Fund accounts.

The legislation provides that a number of subsidiary accounts are to be maintained for each member in respect of money standing to the member's credit in the Fund.

Withdrawals

The legislation details when withdrawals can be made from the Fund.

The legislation provides that no sum of money standing the credit of a member of the Fund may be withdrawn from the Fund except with the authority of the board of the Fund.

Legislation provides that a member of the Fund is entitled to withdraw the sum standing to the credit of the member in the Fund at any time after the board of the Fund is satisfied that the member:

a)            Has attained a certain age

b)            Not being a citizen of Country X, has left or is about to leave Country X permanently with no intention to return; or

c)            Being a citizen of Country Y has left or is about to leave Country X permanently in such circumstances as the Minister may approve.

Subsidiary Account A

Members can withdraw amounts from Subsidiary Account A for a number of medical expenses for either the member or their dependent.

While a member can take funds out of Subsidiary Account A for medical expenses, they can also just use their existing savings to fund these expenses.

A reason a member can make a withdrawal is to pay the insurance premiums for the X insurance scheme.

A member can only pay a premium for a dependent upon application to the Fund.

All Country X citizens and permanent residents are covered by the scheme.

A member can also use their Subsidiary Account A to pay the premiums for other insurance plans.

These offer expanded coverage which isn't found in the general scheme. A member can make an application to the Fund board to use the funds in Subsidiary Account A to fund premiums for these plans.

The legislation provides that if a member has less than the requisite amount in Subsidiary Account A, they can apply to the Fund to transfer any sum in their other subsidiary accounts, or in both their accounts, to Subsidiary Account A.

The legislation also permits a member to transfer the whole or part of the funds in their other subsidiary accounts to the Subsidiary Account A of a dependant.

Even past the age of X, a member cannot access the funds in the Subsidiary Account A except for the purpose of paying premiums or paying for healthcare for them or their dependents.

By and large, the outgoings from Subsidiary Account A are used to pay insurance premiums.

Investments

A member can withdraw amounts from Subsidiary Account B and C to invest personally in a wide range of investments.

To use funds from Subsidiary Account B, a member sets up an account with a bank.

Once the account is established, a member can approach various product providers to buy or sell their investments.

Any proceeds earned on the investment are placed in the account.

A member can withdraw moneys from Subsidiary Account C for certain investments if there is at least a balance of $X standing to their credit in Subsidiary Account C.

There are increased limitations on the investments you can make from Subsidiary Account C. These are generally investment that carry lower risk.

Upon the sale of the investments, all proceeds will be transferred to a member's Subsidiary Account C

Education loans

Legislation provides that the Fund may permit a member of the Fund to withdraw such portion of funds in the Fund to be used for education for them or their family.

This is subject to the repayment of the amount withdrawn including interest that would have been payable.

Only Subsidiary Account B savings can be used.

The full amount of the loan and the accrued interest has to be repaid and cannot be waived under any circumstance.

Upon the death of a member, repayments shall cease.

Property loans

Legislation allows members to withdraw amounts from their Subsidiary Account B as a loan to buy an approved property. They are then required to repay the amount upon sale of the property. The amount they have to repay also includes an amount of interest that would have been payable if the withdrawal had not been made.

Under normal circumstances, Subsidiary Account C cannot be used for housing purposes.

You and your partner acquired a dwelling in Country X on XX XXXX XXXX.

You withdrew X to purchase the property from the Entity X. These funds came from Subsidiary Account B.

Your partner also used amounts from their accounts in the Fund to fund this acquisition.

You had equal interests in the ownership in the property.

Ownership in the property is by long term lease.

You were listed as the lessee and Entity X as the lessor.

Entity X would undertake renovations to the property from time to time and paid for more than 90% of the renovation costs.

Legislationprovides that where a member has withdrawn moneys to purchase a property and then dies, then the amounts shall cease to be payable to his account in the Fund.

Upon the sale of the property, two transactions occurred to directly pay amounts your Fund accounts on XX XXXX XXXX of:

•         $X (into Subsidiary Account B); and

•         $X (of this, $X into Subsidiary Account B, and $X into Subsidiary Account C)

These amounts represent a repayment of what was withdrawn to acquire the dwelling in XXXX, and to satisfy the Government requirements that an additional amount be paid into the fund that represents the amount that would have been accumulated in the Fund had the funds not been taken out for housing.

You used for private purposes what was the sale proceeds minus transitions costs and what contributed back to the Fund.

Australian dwelling

You and your spouse now reside in a dwelling in Australia.

You will elect this dwelling to be your main residence from the date it was acquired.

Assumptions

For the purposes of this Ruling, it is assumed that the Fund:

a)            Is an indefinitely continuing fund

b)            Is not a public sector superannuation scheme

You will withdraw a lump sum amount from the Fund during the ruling period.

Relevant legislative provisions

Income Tax Assessment Act 1997 Subdivision 305-B

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax Assessment Act 1997 section 102-20

Income Tax Assessment Act 1997 Division 115

Income Tax Assessment Act 1997 section 855-45

Income Tax Assessment Act 1997 Subdivision 118-B

Income Tax Assessment Act 1997 section 118-170

Income Tax Assessment Act 1997 section 118-145

Income Tax Assessment Act 1997 section 118-130

Income Tax Assessment Act 1997 section 118-185

Income Tax Assessment Act 1936 section 99B

Superannuation Industry (Supervision) Act 1993 section 10

Superannuation Industry (Supervision) Act 1993 section 19

Superannuation Industry (Supervision) Act 1993 section 62

Reasons for decision

Question 1

Is the Fund or any of the subsidiary accounts considered, to be a foreign superannuation fund as defined in section 995-1 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

No.

Detailed reasoning

Meaning of 'foreign superannuation fund'

A foreign superannuation fund is defined in subsection 995-1(1) of the ITAA 1997 as follows:

(a) a superannuation fund is a foreign superannuation fund at a time if the fund is not an Australian superannuation fund at that time; and

(b) a superannuation fund is a foreign superannuation fund for an income year if the fund is not an Australian superannuation fund for the income year.

Subsection 295-95(2) of the ITAA 1997 defines Australian superannuation fund as follows:

A superannuation fund is an Australian superannuation fund at a time, and for the income year in which that time occurs, if:

(a) the fund was established in Australia, or any asset of the fund is situated in Australia at that time; and

(b) at that time, the central management and control of the fund is ordinarily in Australia; and

(c) at that time either the fund had no member covered by subsection (3) (an active member) or at least 50% of:

(i) the total market value of the fund's assets attributable to superannuation interests held by active members; or

(ii) the sum of the amounts that would be payable to or in respect of active members if they voluntarily ceased to be members;

is attributable to superannuation interests held by active members who are Australian residents.

A superannuation fund that is established outside of Australia and has its central management and control outside of Australia would qualify as a 'foreign superannuation fund'. The fact that some of its members may be Australian residents would not necessarily alter this.

Meaning of 'superannuation fund'

'Superannuation fund' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by section 10 of the Superannuation Industry (Supervision) Act 1993 (SISA).

Subsection 10(1) of the SISA states:

superannuation fund means:

(a) a fund that:

(i) is an indefinitely continuing fund; and

(ii) is a provident, benefit, superannuation or retirement fund; or

(b) a public sector superannuation scheme.

Meaning of 'provident, benefit, superannuation or retirement fund'

Whether the Fund is a foreign superannuation fund requires careful consideration of the meaning of the term 'provident, benefit, superannuation or retirement fund' in subsection 10(1) of the SISA. Each of these terms are not defined in the ITAA 1936, ITAA 1997, the SISA 1993 or elsewhere in the tax acts. Accordingly, those terms will derive their meaning from the relevant case law.

In the context of considering the term 'provident, benefit or superannuation fund established for the benefit of employees', in former subparagraph 23(j)(i) of the ITAA 1936, the Full Bench of the High Court in Mahony v Commissioner of Taxation (Cth) (1967) 41 ALJR 232; (1967) 14 ATD 519 (Mahony) considered that this phrase denoted 'a purpose narrower than the conferral of benefits in a completely general sense' and had to be characterised by 'some specific future purpose'. In the case of a provident fund, against 'contemplated contingencies; in the case of a superannuation fund 'on retirement, death or cessation of employment'; and, in the case of a benefit fund 'a benefit characterised by some specific future purpose' (e.g. a funeral fund).

Furthermore, Justice Kitto's judgement indicated that a fund does not satisfy any of the three provisions, that is, 'provident, benefit or superannuation fund', if there exist provisions for the payment of benefits 'for any other reason whatsoever'.

A similar approach was adopted by Taylor J and Windeyer J who said:

...In other words, if they could, keeping within the terms of the trust, apply the fund or any portion thereof to purposes foreign to the true purposes of such a fund, then it would not be such a fund.

Accordingly, the purpose of the fund must be solely consistent with it being a 'provident, benefit or superannuation fund'.[1] Similar observations have been made in a number of authorities.[2]

In the context of what constitutes a 'superannuation fund' and a 'fund', Justice Windeyer in Scott v. Federal Commissioner of Taxation (No. 2) (1966) 10 AITR 290; (1966) 40 ALJR 265; (1966) 14 ATD 333 emphasised the 'sole purpose' requirement, stating:

...I have come to the conclusion that there is no essential single attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion "fund", I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised. I do not put this forward as a definition, but rather as a general description.

More recently, in considering the term 'provident, benefit, superannuation or retirement fund' as it now appears in the definition of 'superannuation fund' in subsection 10(1) of the SISA, Senior Member FD O'Loughlin in Baker v. FC of T [2015] AATA 469 (Baker) stated at [16] that:

Accordingly, a trust arrangement that is not a provident fund, benefit fund or retirement fund, that allows for payment of superannuation styled benefits and other benefits not permitted by the Supervision Act will not be a superannuation fund.

Whilst the Senior Member in Baker made reference to 'benefits not permitted by the Supervision Act' in the context of considering whether a particular fund which was not a 'provident, benefit or retirement fund' was a 'superannuation fund', it is noted that section 62 of the SISA largely replicates the relevant case law and requires the fund be 'maintained solely' for one or more of the 'core purposes' of providing benefits to a member when the events occur:

•         on or after retirement from gainful employment;

•         attaining a prescribed age; or

•         on the member's death (this may require the benefits being passed on to a member's dependants or legal representative).

Whether a fund has been established for the requisite purpose required, is determined by carefully considering the terms of the trust deed. This is an objective determination, and it is not determined by the subjective intentions of the parties.[3] Whether a particular arrangement constitutes a superannuation fund is dependent upon the facts and circumstances of the case. In particular, regard is had to the terms of the constituent arrangements and what the relevant trustee can and cannot do, and is and is not obliged to do, with the trust assets and property.[4] As Taylor and Windeyer JJ observed in Mahony:

It thus becomes necessary to look carefully and critically at the terms of the trust deed, at what is required and what is permitted - that is to say in what ways the trustees might, without any breach of the trusts it imposes, apply the trust property.

The terms 'provident' and 'benefit' may refer to funds that have features including medical, funeral, sickness, hospital and dental cover. Withdrawals for these reasons are to address a future need or contingency (as in the High Court case of Mahony referred to above). However, these benefits do not include the funding of a member's education or their family's education.

Similarly, while benefits for medical reasons, such as withdrawals for the payment of health premiums or medical care could be considered to address a future need or contingency and be considered a benefit provided by a provident or benefit fund, withdrawals for use by dependents is not strictly for the member's benefit or contributing to their retirement.

In the present case, the Fund allows withdrawal of benefits when members reach retirement age, or upon their death or invalidity. That is consistent with the Fund being a superannuation fund.

However, the Fund also allows for withdrawal of benefits before retirement age for:

•         expenses for certain medical or hospital expenses for the member and/or their dependent;

•         the payment of health insurance premiums for both the member or/and their dependent;

•         a loan related to the purchase of a principal residence for the member;

•         a loan for the payment of tuition fees at an approved education institution for the member and/or their dependent;

•         amounts for the member to personally invest in various allowed investments (with the qualifier that the proceeds must be returned to the Fund post the sale of the investments)

These are not the payments of superannuation benefits upon retirement, invalidity or death; nor are they benefits characterised by some specific future purpose or contemplated contingency in the sense contemplated by a provident or benefit fund.

Conclusion

Accordingly, in circumstances where the Fund permits the withdrawal of benefits for purposes not solely consistent with the fund being a 'superannuation fund', the Fund cannot be a 'foreign superannuation fund' as defined in subsection 995-1(1) of the ITAA 1997.

Question 2

Is the lump sum payment made from a scheme for the payment of benefits in the nature of superannuation upon retirement or death that satisfies the conditions set out in subsection 305-55(2) of the ITAA 1997?

Answer

No.

Payment 'in the nature of superannuation upon retirement or death'

Where the Fund is not a superannuation fund, consideration needs to be given as to whether the payment is made from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death' as contemplated by subsection 305-55(2) of the ITAA 1997.

Subsection 305-55(3) of the ITAA 1997 ensures that payments from foreign superannuation schemes under subsection 305-55(2) are taxed in the same way as if they were paid from a 'foreign superannuation fund'. It is intended to apply to payments that, though not from a superannuation fund, are nevertheless payments made from a scheme that has the same characteristics as superannuation.

Subsection 305-55(2) does not define the concept of payment of benefits 'in the nature of superannuation'.

The ordinary meaning of 'in the nature of' is something similar to, typical of, or in the manner of' superannuation. Therefore, payments which closely align with the purpose of superannuation will amount to payments in the 'nature of superannuation'.

In Baker, Senior Member FD O'Loughlin at stated at [19]:

... for a payment to be a payment from a scheme for the payment of benefits in the nature of superannuation upon retirement the scheme would need to provide for payments that have the essential qualities, character or features of payments of superannuation benefits on retirement. Further, the scheme would need to be such that such payments were more than just possibilities among a range of alternatives such as simple withdrawals available at any time.

Baker was decided on the basis money could be withdrawn from an Individual Retirement Account (IRA) at any time prior to any retirement event at the complete discretion of the IRA account holder. Due to the flexibility of monetary withdrawals from an IRA payments, 'in the nature of superannuation' payments from it were but one of a number of possibilities. Accordingly, this meant that the scheme was not one for the payment of benefits 'in the nature of superannuation upon retirement or death' within the meaning of section 305-55(2) of the ITAA 1997.

Similarly, in the present context, whilst moneys could be withdrawn from the Fund for purposes that do come within the nature of superannuation upon retirement or death, this was one of a range of possibilities for which that benefits could be withdrawn. Those other possibilities having no direct connection with a 'benefit in the nature of superannuation upon retirement or death'.

Further, no information was provided to suggest that the Fund was divided into discrete schemes or subparts whereby they operated in a manner to enable benefits from them to be able to be regard as being 'in the nature of superannuation'.

Question 3

Is any part of a lump sum payment to be transferred from the Fund applicable fund earnings under section 305-75 of the ITAA 1997?

Answer

No.

Taxation of funds as applicable fund earnings

As the Fund is not a 'foreign superannuation fund' and nor is the payment paid from a scheme for the payment of benefits 'in the nature of superannuation upon retirement or death', section 305-70 of the ITAA 1997 does not apply to any lump sum received by the you from the Fund. Accordingly, no part of any such lump sum is applicable fund earnings for the purposes of section 305-75 of the ITAA 1997.

Question 4

Is any part of the lump sum payment from the Fund assessable income under section 99B of the Income Tax Assessment Act 1936 (ITAA 1936)?

Answer

Yes.

Detailed reasoning

A distribution from the Fund may be subject to assessment under section 99B of the ITAA 1936.

Broadly, section 99B of the ITAA 1936 deals with the receipt of trust amounts that have not previously been subject to tax in Australia. It applies where an Australian resident for tax purposes receives a lump sum payment from a foreign trust.

Subsection 99B(1) of the ITAA 1936 provides that where a beneficiary who was an Australian resident at any time during an income year is paid an amount from a trust, or has an amount of trust property applied for their benefit, that amount is to be included in the assessable income of the beneficiary in the income year it is paid.

However, subsection 99B(2) of the ITAA 1936 reduces the amount to be included in assessable income under subsection 99B(1) by so much of that amount, relevantly for present purposes, as represents the corpus of the trust, but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer.

The term 'corpus' is not defined in the legislation; therefore, it takes the ordinary meaning of the term. The Macquarie Dictionary (Online edition 2019) defines 'corpus' to mean a 'principal or capital sum, as opposed to interest or income'.

The amount that represents the corpus of the Fund includes any amounts previously deposited into the Fund by you and your employer. The lump sum may also include amounts that represent earnings of the Fund. Fund earnings are not taken to represent corpus, as the earnings are attributable to income derived by the Fund which would have been subject to tax had the earnings been derived by a resident taxpayer.

Therefore, paragraph 99B(2)(a) of the ITAA 1936 applies to you so that:

a)    the proportion of any lump sum that represents amounts previously deposited to the Fund by you and your employer is excluded from your assessable income, and

b)    the proportion of any lump sum that represents earnings of the Fund (from the commencement date of the Fund) is included in your assessable income.

Question 5

If the answer to question 4 is yes, are the government contributions to the Fund excluded by paragraph 99B(2)(a) of the ITAA 1936?

Answer

No.

Detailed reasoning

As discussed above, a taxpayer who is a resident of Australia for taxation purposes, and who is a beneficiary of such account, will include in their assessable income, pursuant to section 99B, all amounts paid to them, or applied for their benefit, subject to the exclusion contained in paragraph 99B(2)(a) of the ITAA 1936.

Consequently, the assessable amount is the total amount received less any amounts deposited to the Fund (the corpus) by the taxpayer, or on their behalf. The taxpayer is taxed only on the earnings of the investment on withdrawal, not on the corpus returned to them. Any earnings in the fund are only assessable in Australia on withdrawal from the fund.

The whole amount of the earnings is assessable in Australia, not just the earnings that accrued from when you became a resident of Australia for taxation purposes.

This is consistent with the Commissioner's view in ATO Interpretative Decision ATO ID 2011/93 Income Tax: Application of section 99B of the Income Tax Assessment Act 1936 when accumulated foreign source income is paid to an Australian resident beneficiary who was a non-resident when the trustee derived the income.

The earnings, or income, must be included in your Australian tax return in the year you withdraw the lump sum amount from the account.

Based on case law, it can be said that ordinary income generally includes receipts that are earned, expected, relied upon, and have an element of periodicity, recurrence or regularity.

Interest or an amount that is 'interest-like' in nature would generally be considered as income to the recipient.

Interest

The term 'interest' is not defined for the purposes of the ITAA 1997.

Interest is in essence compensation to a lender for being kept out of the use and enjoyment of the principal sum (Federal Commissioner of Taxation v. The Myer Emporium Ltd (1987) 163 CLR 199). It is an amount that is calculated by reference to a principal sum and by reference to time (Federal Wharf Co Ltd v. Deputy Commissioner of Taxation (1930) 44 CLR 24 at 28; per Cooper J in Century Yuasa Batteries Pty Ltd v. Federal Commissioner of Taxation (1997) 73 FCR 528.

In your case, the payments are paid regularly and calculated by reference to the principal sum in your Fund account at the time. The legislated payments are referred to as 'interest' by the Fund which are paid on the balance of your account, rather than any other manner of calculation and payment. Therefore, the payments would not be excluded by 99B(2)(a) of the ITAA 1936.

Question 6

Is the sale of your property subject to Capital Gains Tax (CGT)?

Answer

Yes.

Detailed reasoning

Capital gains tax

You make a capital gain or capital loss when a capital gains tax (CGT) event happens to a CGT asset you own.

As an Australian tax resident, your assessable income includes income from all sources, whether in or out of Australia. If you dispose of an overseas asset when you are an Australian resident for tax purposes, you will be subject to the CGT provisions.

According to section 102-20 of the ITAA 1997, you make a capital gain or capital loss when a CGT event happens to a CGT asset you own. You make a capital gain if the amount you received (called capital proceeds) from disposing of the asset exceeds the cost base (the cost of the asset and certain other costs associated with acquiring, holding and disposing of the asset) of the CGT asset.

Discount capital gains

When you sell or otherwise dispose of an asset, you can reduce your capital gain by 50%, if both of the following apply:

•         you owned the asset for at least 12 months

•         you are an Australian resident for tax purposes.

This is called the capital gains tax (CGT) discount.

CGT implications when becoming an Australian tax resident

Section 855-45 of the ITAA 1997 sets out the CGT consequences of a foreign resident individual becoming an Australian resident. If an individual becomes an Australian resident, then, for each CGT asset that was owned just before the individual or company became an Australian resident (except an asset that is taxable Australian property or an asset that was acquired before 20 September 1985):

1.    the asset is taken to have been acquired by the individual at the time of becoming an Australian resident, and

2.    the first element of the cost base and reduced cost base of the asset at the time of becoming an Australian resident is its market value at that time.

This provision is designed to ensure that gains which accrued on those assets while the person was a foreign resident will be excluded from the CGT provisions.

Therefore, the first element of the cost base for your interest in the property is the market value of that property when you became an Australian resident on XX XXXX XXXX.

When you sell the property, you could be subject to a capital gain or loss.

Question 7

If the answer to question 6 is yes, are you eligible to apply a full main residence exemption on the sale of the property?

Answer

No.

Detailed reasoning

Main residence exemption

The main residence exemption under subdivision 118-B of the ITAA 1997 may allow you to disregard all or part of any capital gain or capital loss you made from a CGT event that happens to your ownership interest in a dwelling where the dwelling was your main residence.

The main residence exemption allows the capital gain or loss from the disposal of a dwelling to be disregarded for CGT purposes if you are an individual and the dwelling was your main residence throughout the ownership period (subject to some conditions). A taxpayer may only elect one residence at a time to be their main residence.

Spouse with more than one dwelling

Under section 118-170 of the ITAA 1997, if you and your spouse have different homes for a period of time, you and your spouse must either:

•         choose one of the homes as the main residence for both of you for the period, or

•         each nominate one of the different homes as your main residence for the period.

Whether you both hold an interest in the homes is not relevant for the purposes of the election. It is also possible to make this election in circumstances where one of you (either you or your spouse) never live in the home nominated as the main residence for both of you.

Absences

Section 118-145 of the ITAA 1997 allows you to treat a dwelling (that was your main residence) as your main residence indefinitely, if you do not use it for the purpose of producing assessable income. However, if you do use it for that purpose, you can only treat the dwelling as your main residence for a maximum period of six years while you use it for that purpose.

For any period(s) you choose to apply the main residence exemption, you cannot treat any other dwelling as your main residence for that period of time.

In your case, you have not lived in the property as your main residence since becoming an Australian tax resident and will elect to treat your dwelling in Australia as your main residence from the date it was acquired in XXXX. As the property will not be elected as the main residence of you (and your spouse) you cannot apply a full main residence exemption upon its sale. As discussed at question 6, the first element of your cost base will be the market value on the day you became an Australian tax resident in XXXX.

Question 8

If the answer to question 7 is no, are you eligible to apply a partial main residence exemption on the sale of the property?

Answer

Yes.

Detailed reasoning

As discussed earlier, generally, where you own property in a foreign country before becoming an Australian resident, only capital gains or capital losses that accrue in respect of that property after you become a resident are subject to the provisions of Parts 3-1 and 3-3 of the ITAA 1997.

In considering the main residence exemption, regard is had to your 'ownership period' of a dwelling (or interest in a dwelling) and the number of days during that period that the dwelling was your main residence. Subsection 118-130(2) provides that you have an ownership interest a dwelling that you acquire under a contract from the time when you obtain legal ownership of it. Generally, this happens when the contract is settled.

In this case, your ownership interest in the dwelling commenced in 1997. Taxation Determination TD 95/7 Income tax: capital gains: does subsection 855-45(3) of the Income Tax Assessment Act 1997 prevent a taxpayer from making a choice that section 118-145 of that Act apply to an overseas dwelling that the taxpayer owned before becoming a resident of Australia? provides that although for Australian tax purposes subsection 855-45(3) of the ITAA 1997 deems an acquisition date for certain assets on a non-resident becoming an Australian resident taxpayer, this does not mean that the assets were not owned by the taxpayer before the taxpayer became a resident. Therefore, section 118-130 of the ITAA 1997 is not modified in cases where a dwelling is taken to have been acquired at another time by a provision of the ITAA 1997.

Section 118-185 of the ITAA 1997 states that if a dwelling was your main residence for only part of your ownership period, you will only get a partial exemption for a CGT event that occurs in relation to the dwelling. The capital gain or loss is calculated using the following formula:

Total capital gain or loss ×Non-main residence days ÷ Total days in your ownership period

As the dwelling was your main residence for only part of your ownership period, you can claim a partial main residence exemption for the period the dwelling was your main residence between XXXX and XXXX.

Question 9

Can you include the full amount paid into the Fund in the cost base of the property?

Answer

No.

Detailed reasoning

The cost base of a CGT asset is made up of the following five elements:

•         The first element: money or property given for the asset.

•         The second element: incidental costs of acquiring the asset or that relate to the CGT event.

•         The third element: costs of owning the asset.

•         The fourth element: capital costs to increase or preserve the value of your asset or to install or move it.

•         The fifth element: capital costs of preserving or defending your ownership of or rights to the asset.

As discussed at Question 6, the first element of the cost base for your interest in the property is the market value at the date you became an Australian resident. This is taken to be inclusive of all amounts included in the first element of the cost base prior to that date, which initially would have included the amount of $X withdrawn from the Fund to fund the purchase in the first element. You cannot claim the amount refunded to the Fund that represents the amount initially withdrawn to purchase the property as that amount has already been included in the cost base.

The amount that represents the accrued interest can be included in the third element of the cost base as it represents a cost of owning the property. However, it will need to be apportioned to only include the amounts that are incurred post you becoming an Australian resident.

Question 10

Will the full amount you were required to recontribute to the Fund from the sale of the property (including accrued interest) be excluded under paragraph 99B(2)(a) of the ITAA 1936?

Answer

No.

Detailed reasoning

As discussed at Question 4, paragraph 99B(2)(a) of the ITAA 1936 reduces the amount to be included in assessable income by so much of that amount as represents the corpus of the trust, but not to the extent that it is attributable to income derived by the trust which would have been subject to tax had it been derived by a resident taxpayer.

The amounts that represent corpus will include those amounts that were originally contributed into the Fund by you and your employer.

In this case, the amount you were required to recontribute to the Fund from the sale of your property included:

•         returning the amount you withdrew from the Fund to finance your purchase of the property ('the returned amount); this included both amounts contributed to the Fund by you and your employer, and amounts of interest paid by the Board to the Fund, and

•         paying an additional amount to "boost" your own retirement fund ('the interest amount').

In respect of the returned amount:

•         the portion that represents the return of amounts contributed to the Fund by you and your employer are corpus and excluded under paragraph 99B(2)(a) of the ITAA 1936, and

•         the portion that represents interest the Board paid to the Fund will not be excluded under paragraph 99(2)(a)

The interest amount you paid is not corpus and will not be excluded under paragraph 99(2)(a) of the ITAA 1936.

[1] See further the discussion of Member McCaffrey in Case R49 16 TBRD 219 at 221-222 as to whether a employee benefit fund was a 'provident, benefit or superannuation fund'.

[2] Scott v Cmr of Taxation (Cth) (No 2)(1966) 40 ALJR 265 at 278; Cameron Brae Pty Ltd v Federal Commissioner of Taxation (2007) 161 FCR 468; Compton v Federal Commissioner of Taxation (1966) 116 CLR 233; Walstern Pty Ltd v. Commissioner of Taxation (2003) 138 FCR 1.

[3] Brynes v. Kendle [2011] HCA 26 at [115].

[4] Baker at [12]; see also Raymor Contractors Pty Ltd v. Federal Commissioner of Taxation (1991) 91 ATC 4259.