Edited version of private advice

Authorisation Number: 1052250329594

Date of advice: 10 May 2024

Ruling

Subject: CGT - International

Question

Is a capital gain or loss you make on the sale of the International property disregarded?

Answer

Yes.

This ruling applies for the following periods:

Period ending 30 June 20XX

Period ending 30 June 20XX

The scheme commenced on:

1 July 20YY

Relevant facts and circumstances

You are not a resident of Australia for taxation purposes.

You purchased a property Internationally in XX 20XX.

You and your family permanently relocated Internationally in XX 20XX at which time you ceased to be a resident of Australia for taxation purposes.

You were granted a permanent resident visa for the International Country on XX XX 20XX.

You did not report a capital gains event in your 20XX tax return.

You listed the International Country property for sale on XX XX 20XX.

You intend to return to Australia on a permanent basis with your family in XX 20XX.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 104-160

Income Tax Assessment Act 1997 section 104-165(2)

Income Tax Assessment Act 1997 section 104-165(3)

Income Tax Assessment Act 1997 section 103-25(1)

Income Tax Assessment Act 1997 section 855-10

Income Tax Assessment Act 1997 section 855-15

Income Tax Assessment Act 1997 section 855-20

International Tax Agreements Act 1953 Schedule 2, Article 13

International Tax Agreements Act 1953, Schedule 2, Article 13(6)

Reasons for decision

If you stop being an Australian resident, section 104-160 of the Income Tax Assessment Act 1977 (ITAA 1997) determines what happens to your assets.

Capital gains tax (CGT) event I1 occurs at the time you cease to be a resident and triggers a deemed disposal rule for your assets that are not 'taxable Australian property' (non-TAP), requiring you to calculate and report any capital gains or losses in your final Australian tax return. You are taken to have disposed of your assets that are non-TAP for their market value. CGT event I1 and applies to all CGT assets that you own, subject to certain exceptions such as 'taxable Australian real property' (TARP) as this remains subject to CGT regardless of your residency status. Taxable Australian property is defined in section 855-15 of the ITAA 1997 and includes real property situated in Australia.

There is an exception in subsection 104-165(2) ITAA 1997, which enables an individual ceasing to be a resident of Australia to choose to defer the CGT liability on assets that are not taxable Australian property. The choice must be all for all assets subject to CGT event I1.

The choice is made when lodging the income tax return for the relevant income year.

The effect of the choice is that the non-TAP assets will be treated as 'taxable Australian property' until the assets are subject to a later CGT event, or the individual becomes a resident again. The CGT liability on those assets that would otherwise arise on becoming a foreign resident is deferred.

As a result of this choice, a disposal of 'taxable Australian property' when you are a foreign resident will be taxable in Australia even though you are no longer a resident for tax purposes.

In determining liability to Australian tax on income received by a non-resident, it is necessary to consider not only Australia's income tax laws, but any applicable tax treaty contained in the International Tax Agreements Act 1953.

Certain Double Taxation Agreements (DTAs) override Australia's taxing rights in respect of capital gains made on assets that have been subject to a deferral choice on ceasing residency.

Article 13 of the USA DTA deals with the alienation of property. Article 13(6) provides that an individual who made an election to defer taxation on income or gains relating to property which would be otherwise taxable in Australia upon the individual ceasing to be a resident of Australia for the purposes of its tax, shall, if the individual is a resident of the International Country be taxable on income or gains from the subsequent alienation of that property only in the International Country.

If an individual made a choice under section 104-165(2) to defer the taxation on a capital gain or loss relating to International property upon cessation of Australian residency. Any subsequent disposal by the non-resident individual can only be taxable in the International Country by virtue of article 13(6).

Application to your circumstances

CGT event I1 happened when you stopped being a tax resident of Australia. It applied to all CGT assets you own, except real property situated in Australia ('taxable Australian real property' or TARP) as these remain subject to CGT regardless of your residency status. The event happened at the time you ceased to be a resident.

When you stopped being a tax resident of Australia you chose to defer reporting a capital gain or loss from the CGT assets covered by CGT event I1. Each of those assets was then deemed 'taxable Australian property' (TAP).

The International Country DTA overrides Australia's taxing rights in respect of capital gains made on assets that have been subject to a deferral choice on ceasing residency.

Therefore, as a resident of the International Country when the asset is sold, there will be no Australian CGT liability as the International Country DTA gives excusive taxing rights to the International Country.

Further information

Note that if you again become a resident of Australia, those assets for which an election was not made are taken to have been acquired at their original date of acquisition, and not at the time of becoming a resident as otherwise applies under section 855-45 ITAA 1997 on becoming a resident.

If you become an Australian resident, there are rules relevant to each CGT asset that you owned just before you became an Australian resident, except an asset:

(a) that is taxable Australian property; or

(b) that you acquired before 20 September 1985.

If you resume your Australian residency, although section 855-45 of the ITAA 1997 does provide for a market valuation rule, it does not apply to TAP assets, including those assets effectively taken to be TAP as a result of an election under section 104-165(2). The ATO concludes in its Interpretive Decision ATO ID 2009/148 Income Tax. CGT: non-resident becomes resident - assets in respect of which choice was made to treat as having the necessary connection with Australia that, as a result of the taxpayer's choice, the assets are taken to be taxable Australian property and therefore, the acquisition rule in section 855-45 of the ITAA 1997 will not apply. TAP assets remain in Australia's CGT net and the election under section 104-65(2) cannot be used.