Edited version of private advice

Authorisation Number: 1052280089632

Date of advice: 26 July 2024

Ruling

Subject: Capital gains tax

Issue 1

Capital Gains Discount

Question 1

Are you eligible for a partial Capital Gains Tax (CGT) discount for the XXXX property?

Answer

No.

Question 2

Are you eligible for a partial Capital Gains Tax (CGT) discount for the XXXX property?

Answer

Yes.

Issue 2

Main Residence Exemption

Question 2

Can you use the 6-year absence rule to qualify for a proportionate main residence exemption for the XXXX property?

Answer

No.

This ruling applies for the following period:

Year ending 30 June XXXX

The scheme commenced on:

1 July XXXX

Relevant facts and circumstances

You were on a temporary resident visa while you were in Australia.

On XXXX you jointly purchased a property, with equal ownership, at XXXX.

You advised you were a resident for tax purposes when you purchased the XXXX property and until the XXXX.

You had already returned overseas and was a foreign resident when you sold your property in XXXX on XXXX.

On XXXX you solely purchased a property at XXXX and lived there as your main residence.

You lived at the XXXX property from the time of purchase until XXXX when you vacated the property and rented it out.

The XXXX property started generating rental income on XXXX.

You advised you were a resident for tax purposes from the time of purchasing the XXXX property until XXXX.

You had already returned overseas and was a foreign resident when you sold your property in XXXX on XXXX.

.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 115-105

Income Tax Assessment Act 1997 Section 115-115

Income Tax Assessment Act 1997 Subsection 115-115(2)

Income Tax Assessment Act 1997 Subsection 115-115(4)

Income Tax Assessment Act 1997 Subsection 115-115(5)

Income Tax Assessment Act 1997 Section 118-110

Income Tax Assessment Act 1997 Subsection 118-110(1)

Income Tax Assessment Act 1997 Subsection 118-110(3)

Income Tax Assessment Act 1997 Subsection 118-110(4)

Income Tax Assessment Act 1997 Subsection 118-110(5)

Income Tax Assessment Act 1997 Section 118-145

Income Tax Assessment Act 1997 Section 768-915

Income Tax Assessment Act 1997 Section 855-15

Income Tax Assessment Act 1997 Section 855-20

Income Tax Assessment Act 1997 Division 855

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

Reasons for decision

Subsection 995-1 of the ITAA 1997 provides that an individual is a temporary resident for taxation purposes if:

a) they hold a temporary visa granted under the Migration Act 1958, and

b) they are not an Australian resident within the meaning of the Social Security Act 1991, and

c) they do not have a spouse who is an Australian resident within the meaning of the Social Security Act 1991.

Based on the facts provided, you are classified as a temporary resident a from when you migrated to Australia. In your case you hold a XXXX temporary resident visa.

A foreign resident or temporary resident is liable to capital gains tax (CGT) when they dispose of taxable Australian property. Taxable Australian property includes real property located in Australia (sections 855-15 and 855-20 ITAA 1997).

Section 118-110 of the ITAA 1997 outlines the rules regarding Capital Gains Tax (CGT) main residence exemptions.

Section 768-915 of the TAA 1997 states that a capital gain or capital loss you make from a CGT event is disregarded if:

a. you are a temporary resident when the CGT event happens and

b. you would not make a capital gain or loss from the CGT event, or the capital gain or loss from the CGT event would have been disregarded under Division 855, if you were a foreign resident when the CGT event happens.

Division 855 applies to foreign residents to disregard a capital gain or loss from a CGT event if the event happens to an asset that is not taxable Australian property (non-TAP). Taxable Australian property (TAP) can include:

•         taxable Australian real property, such as real property situated in Australia; or

•         indirect Australian real property interest.

•         Shares in a resident company do not satisfy the definition of taxable Australian real property, however they may be an indirect Australian real property interest if the shares pass two tests:

o   the non-portfolio interest test; and

o   the principal asset test.

Discount capital gains for the XXXX property

As per section 115-105, the object of this section (with 115-115) is to adjust the discount percentage so as to deny you a discount to the extent that you accrued a capital gain while a foreign resident or temporary resident.

As per note 1 in subsection 115-115(2) - the percentage will be 0 % if you were a foreign resident or temporary resident during all of the discount testing period.

You can only apply the discount to part of your capital gain if you acquired the asset on or before 8 May 2012 and you had a period of Australian residency after 8 May 2012.

In your case you acquired the XXXX property after 8 May 2012 and was a temporary or foreign resident for the period the asset was held, therefore, the discount percentage will be zero.

In your case you had returned overseas permanently and were not a resident for tax purposes when you sold your property in XXXX on XX June 20XX.

Discount capital gains for the XXXX property - acquired before 9 May 2012

Individuals who were foreign or temporary residents on 8 May 2012 may retain access to the full CGT discount for gains accrued in respect of assets acquired up to that date. However, they must choose to use the market value to quantify the gain.

In these circumstances, where the Excess is equal to or more than the discount capital gain calculated at the time of the CGT event (ie the value of the asset fell since 8 May 2012), the discount percentage applying to the discount capital gain will be 50%. If the discount capital gain is more than the Excess the discount percentage is calculated using the formula in section 115-115(5).

If a foreign or temporary resident does not choose to use the market value, the CGT discount is not available for gains accrued prior to 8 May 2012.

In your case you acquired the XXXX property before 8 May 2012 and was a temporary or foreign resident for the period the asset was held. You can choose to apply the CGT discount to the portion of the capital gain that accrued as at 8 May 2012 provided you use the market value of the relevant asset as at that date.

In your case you had returned overseas permanently and were not a resident for tax purposes when you sold your property in XXXX on XX November 20XX.

Note: information on market valuation of assets can be found on the ATO website under QC 66067 about not choosing to use the market value.

Main Residence Exemption

Section 118-110 of the Income Tax Assessment Act 1997 (ITAA 1997) outlines the rules regarding Capital Gains Tax (CGT) main residence exemptions.

Subsection 118-110(1) states that a capital gain or capital loss you make from a CGT event that happens in relation to a CGT asset that is a dwelling or your ownership interest in it is disregarded if:

(a) you are an individual; and

(b) the dwelling was your main residence throughout your ownership period; and

(c) the interest did not pass to you as a beneficiary in, and you did not acquire it as a trustee of, the estate of a deceased person.

Before 9 May 2017, foreign residents had the same access to the main residence exemption as Australian residents.

Amendments contained in subsections 118-110(3), 118-110(4) and 118-110(5) were added as part of the Reducing Pressure on Housing Affordability Measures by the Federal government of Australia in 2019.

The amendments prevent individuals who are not Australian residents for tax purposes access to the main residence exemption.

An exception applies where the person has been a foreign resident for 6 continuous years or less and satisfies a 'life events' test.

Subsection 118-110(3) states:

However, this section does not apply if, at the time the CGT event happens, you:

(a) are an excluded foreign resident; or

(b) are a foreign resident who does not satisfy the life events test.

An 'excluded foreign resident' is defined in subsection 118-110(4)

You are an excluded foreign resident, at a particular time, if:

(a) you are a foreign resident at that time; and

(b) the continuous period ending at that time for which you have been a foreign resident is more than 6 years.

The 'life events' test is defined in subsection 118-110(5):

You satisfy the life events test, at the time a CGT event happens, if:

(a) the continuous period ending at that time for which you have been a foreign resident is 6 years or less; and

(b) you are covered by any of the following subparagraphs:

(i) you or your spouse has had a terminal medical condition that existed at any time during that period of foreign residency;

(ii) your child has had a terminal medical condition that existed at any time during that period of foreign residency, and that child was under 18 years of age at least one such time;

(iii) your spouse, or your child who was under 18 years of age at death, has died during that period of foreign residency;

(iv) the CGT event happens because of a matter referred to in a paragraph of subsection 126-5(1) involving you and your spouse (or former spouse).

To assist those who foreign residents the Australian Government introduced a grandfathering provision (subsection 118-110(1) of the Income tax (Transitional Provisions) Act 1997 (ITTPA 1997) to allow affected taxpayers to ignore a capital gain or loss from a dwelling that was their main residence. The legislation allows for foreign residents to be protected from the new legislation for the period between 7.30pm on the 9 May 2017 to on or before 30 June 2020. The original amendments were destined to begin on 30 June 2019, however in 2019 the government extended the grandfathering provision to continue until on or before 30 June 2020.

Subsection 118-110(1) Income tax (Transitional Provisions) Act 1997:

None of the amendments made by Part 1 of Schedule 1 to the Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures) Act 2019 apply in relation to a capital gain or capital loss you make from a CGT event if:

(a) the CGT event happens on or before 30 June 2020; and

(b) you held an ownership interest in the dwelling to which the CGT event relates throughout the period:

(i) starting just before 7.30 pm, by legal time in the Australian Capital Territory, on 9 May 2017; and

(ii) ending just before the CGT event happens.

After the 30 June 2020, the amendments apply, and foreign residents are only able claim the main residence exemption if they are:

•         not an excluded foreign resident, and

•         they satisfy the 'life events' test.

If you are a foreign resident when a CGT event happens to your residential property in Australia (for example, you sell it), you aren't entitled to claim the main residence exemption.

In your case you sold the XXXX property when you were no longer a tax resident of Australia and you do not satisfy the requirements of the life events test. Consequently, you are not entitled to claim the CGT main residence exemption for the disposal of your XXXX property. So the 6 year absence rule cannot be applied.