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1 Did a capital gains tax event A1 happen to you when the Property was sold?

Yes. Issue 2: Withholding regime for non-resident - capital gains tax Question 2 Are you entitled to claim a credit for the foreign resident capital gain withholding amount under section 18-15 of Schedule 1 to Taxation Administration Act 1953 ? Answer Yes. This ruling applies for the following period : Income year ended 20XX The scheme commenced on: 1 July 20XX

You and Person A began cohabiting after 20 September 1985. After some years you purchased a property (the Property) which was purchased to be your and Person A's matrimonial home. The title of the Property was solely in your name as you had funded the purchase of the Property with a mortgage that was solely in your name. You and Person A moved into the Property immediately after it was purchased and used it as your family home. You resided at the Property with Person A for several years until you separated, when you moved out of the Property with Person A and your children continuing to reside there. You funded all expenses arising in relation to the Property prior to the separation occurring. Several years after your separation you and Person A entered into a Binding Child Support Agreement prepared by lawyers which outlined that you and Person would jointly share your children's care and that if your gross annual earnings reduced below a specified amount that your obligations would be assessed by the Child Support Agency.

On the same date, you and Person A entered into a formal separation agreement (the Separation Agreement) prepared by lawyers that was executed between you and Person A (collectively referred to as the parties) which included the following information: •         The parties separated in 20XX. At separation you vacated the former matrimonial home, being the Property, with Person A and the children remaining there rent free •         Since the separation you had paid the following: ­    The mortgage secured over the Property ­    The utility bills, rates and taxes in relation to the Property; and ­    The children's school fees and other educational expenses and their medical and dental expenses and child support. •         It was agreed that: ­    You would do all acts and things and sign all documents necessary to transfer the Property to Person A, at your expense (Clause 3) ­    You would pay the principal and interest in relation to the mortgage over the Property as and when it fell due. ­    The parties' obligations in relation to the Property are:

o   Person A had the sole responsibility for utility bills, cost of any routine maintenance and all other responsibilities associated with the Property other than mortgage payments; and o   You would meet all the mortgage repayments, rates and taxes and maintenance work costing in excess of a specified amount and would indemnify you for those outgoings. •         The furniture and chattels in the Property were the sole property of Person A. •         Person A acknowledged and accepted that prior to living in a de facto relationship or remarrying, that they would do the following: ­    Enter into an agreement in accordance with section 90B or section 90UB of the Family Law Act 1975 (FLA) to exclude their interest in the Property from any future claims by their de facto partner or future husband; and ­    Bequeath by Will all their right, title, and interest in the Property to XXX and XXX. •         You would retain to the exclusion of Person A your motor vehicle, interests in a specified company and investments through that entity, superannuation, bank accounts and other properties in their name or control.

•         Statements were made to confirm that both you and Person A had received independent legal advice prior to signing the Settlement Agreement. After some years Person A indicated that they and your children wished to purchase a newer property. Person A entered into a contract to purchase Property B, with you paying the deposit amount and funding the purchase of the property, with the purchase price being less than the price range for Property at that time. The title of Property B is registered solely in Person A's name. Several months later a contract of sale of the Property was entered into for the sale price higher than the Property Valuation, with your representative signing the contract on your behalf. After some months, a letter from legal firm, Company X, sent you a letter in relation to the sale of the Property, which included the following: •         A smaller portion of the sale proceeds were distributed to the following entities: ­   The mortgage over the Property ­   The local council ­   Water provider ­   Electronic conveyancing platform fees ­   Legal fees; and ­   Foreign resident capital gains tax withholding amount - Australian Taxation Office (ATO)

•         They confirmed that they had received the balance of the sale proceeds, including the balance of the deposit from the selling real estate agent, being the majority of the sale proceeds, more than twice the total amount that was distributed as outlined above; and •         The foreign resident capital gains tax withholding amount was withheld from the sale proceeds and had been remitted to the ATO. You were required to lodge a tax return declaring your Australian assessable income, including any capital gain from the sale of the property and/or claim a credit for the amount withheld from your sale proceeds. You were a non-resident of Australia when settlement on the disposal of the Property occurred. You did not obtain a clearance certificate which resulted in a foreign resident capital gains tax withholding amount, being 12.5% of the sale proceeds of the Property, being held by the purchaser as foreign resident capital gains withholding, which was remitted by the purchaser to the ATO.

Several months after the Property was sold a Deed of Confirmation (the Deed) was prepared by Company X, which was entered into by you and Person A (collectively referred to as the parties) which included the following information: •         The parties included: ­   you, listed as having an overseas address; and ­   Person A having their address as Property B •         At the time of separation, Person A and your children continued to reside at the Property, which was their home. •         You and Person A entered into the Separation Agreement dealing with the treatment of assets and financial arrangements, and a binding Child Support Agreement. •         While it was contemplated that the Property would be transferred to Person A in the Separation Agreement, for various reasons the transaction was not completed. However, for all intents and purposes, it was understood by the parties that Person A had a life interest in the Property, and you continued to pay for the maintenance and mortgage payments related to the Property.

•         Person A contacted you to advise that they and your children wished to move to new premises as the Property was getting old and you preferred to have a new house. •         You agreed to purchase a new property chosen by Person A for a similar value as the Property to allow Person A and your children to quickly acquire a new property and move into it provided that you would subsequently be able to dispose of the Property and keep the proceeds from the sale to offset the purchase price of the new property. •         At all times, the Property was treated by you and Person A as belonging to Person A for life. •         The Property was valued with a price range being determined (the Valuation Range), and Person A looked at a number of properties, including Property B, within that price range. •         Property B was being auctioned and you had arranged for an estate agent to act on Person A's behalf at the auction, and to facilitate the payment of the deposit if Person A was the successful bidder. You approved an amount up to the highest amount of the Valuation Range for the purchase of Property B, being the top value of the Property at that time.

•         Person A signed the contract for the purchase of Property B for total consideration at the lower end of the Valuation Range. •         You used the services of your attorney to enter into a contract of sale of the Property some months after the purchase of Property B for a sale price higher than the top amount provided in the Valuation Range •         You received correspondence from the ATO outlining that you were a foreign resident and up to 12.5% of the sale proceeds in relation to the sale of the Property may be withheld. •         An amount of foreign resident capital gains tax withholding was withheld by the purchaser of the Property (the Withheld Amount), which was paid to the ATO on Person A's behalf. •         You and Person A wish to enter into this Deed of Confirmation to restate in full the terms and conditions upon which the Property was provided to Person A for life, so that the payment made to the ATO can be recovered in full by Person A. •         The treatment of the Property, as outlined in Clause X, stated: ­   Both you and Person A had treated the Property as belonging to Person A for life and had always consistently acted in that respect.

­   At the time the Property was sold your and Person A's treatment of the Property did not change and remained the same; and ­   The purchase of Property B was undertaken by you to avoid disruption for Person A and your children, which would have occurred if the Property was sold first and alternative properties sought thereafter.

Income Tax Assessment Act 1997 Section 102-20 Income Tax Assessment Act 1997 Section 104-10 Income Tax Assessment Act 1997 Section 104-15 Income Tax Assessment Act 1997 Section 104-85 Income Tax Assessment Act 1997 Section 108-5 Taxation Administration Act 1953 Schedule 1 Subdivision 14-D Taxation Administration Act 1953 Schedule 1 Section 18-15 Taxation Administration Act 1953 Schedule 1 Subsection 18-15(1)

ISSUE 1: Capital gains tax (CGT) Summary A CGT event A1 happened to you when the Property was sold. Detailed reasoning Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is Section 102-20 of the Income Tax Assessment Act 1997 (ITAA 1997) states that a capital gain or capital loss is made only if a capital gains tax (CGT) event happens to a CGT asset. A property is a CGT asset under section 108-5 of the ITAA 1997. Under section 104-10 of the ITAA 1997 CGT event A1 happens if you dispose of a CGT asset. Generally, CGT event A1 happens to the legal owner of a CGT asset just before the disposal of it. However, the CGT provisions do not apply to the legal owner of an asset if the legal owner held it on trust for other persons. In such cases, the trust will be the owner of the asset for CGT purposes unless there is another person that was absolutely entitled to that asset as against the trustee making that other person the owner for CGT purposes. Legal v beneficial ownership

Legal interest in a property is determined by the legal title to the property under the property law legislation in the state or territory in which the property is situated. In certain situations, legal ownership of an asset may differ from the beneficial ownership of an asset. The legal term ' beneficial ownership ' means the right to deal with property as one's own, free of any contractual obligation in respect of it. The person who enjoys the property or who is entitled to the benefit of the property would be considered to be the beneficial owner. If the beneficial owner is absolutely entitled to a CGT asset as against the legal owner, any act done by the legal owner is treated as if it were carried out by the beneficial owner. Taxation Ruling TR 93/32 Income tax: rental property - division of net income or loss between co-owners contains guidance on the issues involved where the equitable interest in a property may not follow the legal title.

As stated in TR 93/32, the Commissioner considers that there are extremely limited circumstances where the legal and equitable interests are not the same and that there is sufficient evidence to establish that the equitable interest is different from the legal title. To prove that a different equitable interest exists, there must be evidence that a trust has been established, such that one party is taken merely to hold their interest in the property for the benefit of the other. It is stated in the ruling that a bare trust was created in relation to your interest in the Property which we have considered below: Application to your situation You purchased the Property, with the title of the Property being solely registered in your name. You were the sole mortgage holder in relation to the Property. You had the benefit of living at the Property for a period after it was purchased until you separated with Person A several years after it was purchased, after which Person A and your children continued to reside at the Property.

You entered into the Separation Agreement with Person A under which they and your children could continue to reside at the Property, with you continuing to be responsible for the mortgage repayments, rates, taxes and maintenance work over a specified amount, with the title of the Property to be transferred to Person A. When you have your name on the title in practical terms you need to have positive evidence about the lack of beneficial ownership, such as evidence of what happened, and if evidence points the other way this makes it more difficult than if you do not have your name on the title and do not have positive contemporary evidence. It is stated in the ruling that: •         You immediately began holding the Property on bare trust as nominee for Person A and that they became the beneficial owner of the property from the date the Separation Agreement was entered into. Person A held beneficial ownership of the property to the exclusion of you. On sale of the Property, the reason the funds from the sale of Property were directed to you was because you had previously provided funds to Person A to enable them to purchase Property B

•         Once it is established that the bare trust existed, section 106-50 of the ITAA97 stipulates that any CGT event pertaining to an asset is recognised by the beneficiary of the bare trust rather than by the trust itself. In this instance, the CGT event would be recognised by Person A but the capital gain is exempt due to the property being their main residence exemption; and •         The only relevant documentation relating to the creation of the trust is the Relationship Agreement and pursuant to clause 3 the title of the Property was to be transferred from you to Person A. If a beneficial interest/s in the Property were held by you and a trust had been created: •         CGT event E1 would have occurred to you when the trust was created over the Property if you were the outright owner of the Property, which would be a taxing point for you. You would have been eligible to a full main residence exemption when that CGT event occurred •         CGT event E7 would have occurred if the Property was transferred from the trust to Person A , which would have been a taxing point for the trust if that had occurred

•         Person A would not be an absolutely entitled beneficiary of the trust in relation to the Property given that it had been indicated in the Deed that they had a life interest in the Property and if there is a life interest there needs to be remainder beneficiary/beneficiaries, which could be your children in this case given that Person A was to transfer the Property into their names if they entered into a de-facto relationship or got remarried; and •         The trust would be the owner of the Property for CGT purposes and Person A would not be an absolutely entitled beneficiary. Therefore, the trust would not be entitled to any main residence exemption as it is a non-individual and therefore could not use that exemption to enable any capital gain made on the disposal of the Property to be disregarded. However, based on the information provided with the ruling we are not able to conclude that your intention was to create a trust in relation to the Property and therefore that you held any beneficial interest in the Property for Person A.

The Separation Agreement was entered into by you and Person A a significant period after the Property was purchased and after you had benefited from being the owner of it. The creation of a trust over property that you already own and have benefited from has to be by way of expressed intent. That is, it has to be an express trust. The Separation Agreement could have been used to create an express trust over the Property, but we do not consider the statements contained in it to be sufficient to achieve this. For example, it does not mention the word 'trust' in relation to the Property. The Separation Agreement is silent on what would happen to the Property should Person A pass away (other than where they commenced a de facto relationship or re-married). You continued to benefit from the Property by using it as security for a loan that you were responsible for. You continued to have the obligations associated with being the owner of the Property. Aside from the mortgage repayments on the loan, you were also responsible for paying rates, taxes and maintenance work costing in excess of a specified amount.

You received a portion of the sale proceeds to pay off that loan. You have also received the net sale proceeds. (That is without considering your entitlement to the foreign resident capital gains tax withholding credit.) The Separation Agreement does however state that it was agreed that you would retain to the exclusion of Person A your motor vehicle, interest in Entity A Pty Ltd and investments through the entity, superannuation, bank accounts and other properties in your name or control. However, the Separation Agreement is silent in relation to any reference in relation to the existence of a trust and/or any beneficial interest in the Property being held for Person A, with it merely stating that the title of the Property will be transferred to Person A. The best fit for CGT purposes of the Separation Agreement is that it caused a CGT event B1 under section 104-15 of the ITAA 1997 to occur, being providing Person A with the use and enjoyment of the Property prior to the title of the Property being transferred to Person A (should they request it and pay all transfer expenses).

CGT event B1 effectively brings forward the time of a disposal (and the time of a capital gain or loss) under such an agreement from the time when the change of ownership takes place to the time when the use and enjoyment of the asset begins. The asset is treated as if it was disposed of when the use and enjoyment of the asset for the expected new owner begins rather than waiting until the time when there is an actual disposal. However, if the title of the asset does not pass under the agreement the CGT event B1 is disregarded. If that occurs and the ownership interest in the relevant CGT asset is transferred/disposed of at a later date the relevant CGT event is CGT event A1 for the legal owner. In your situation, the Separation Agreement is a written agreement which is not viewed as a 'loose family arrangement' of the type described in Taxation Determination TD 1999/78. It provided for the transfer of the title of the Property from you to Person A, with Person A continuing to use the Property after your separation.

CGT event B1 occurred when you and Person A entered in the Settlement Agreement, with you remaining the legal owner, and Person A having the right to the use and enjoyment of the Property with the understanding that they would/should eventually become the owner of the Property. However, the title had not been transferred to Person A in accordance with the Separation Agreement. Therefore, CGT event B1 still happened but the ownership of the Property for CGT purposes reverted to you as the title was not transferred, and the CGT event on the sale of the Property, being CGT event A1, and the CGT implications on the sale of the Property are yours. The information provided supports that the Settlement Agreement provided Person A with contractual rights rather than fiduciary rights, providing Person A with a right to pursue legal action against you in relation to the Property if you did not transfer the title of the Property to Person A in accordance with the Settlement Agreement.

After considering all of the above matters, the Commissioner does not consider it appropriate to conclude that you held the Property beneficially for Person A. Therefore, it has been concluded that the equitable interests in the Property are exactly the same as the legal interests in it. That is that you held the legal and beneficial interests in the Property. Therefore, a CGT event A1 occurred for you when the Property was sold, and you are liable for any CGT implications on the sale of the Property. Note: While you would have been entitled to a full main residence exemption back in 2011 when CGT event B1 happened, from 2020 you are an excluded foreign resident and are no longer entitled to it in relation to CGT event A1 occurring on the sale of the Property. You also lose a portion of the 50% CGT discount. ISSUE 2: Withholding regime for non-resident - capital gains tax Summary You are entitled to claim a credit for the foreign resident capital gains tax withholding (FRCGW) amount under section 18-15 of Schedule 1 of the Taxation Administration Act 1953 (TAA). Detailed reasoning Withholding regime for non-resident - capital gains tax

The foreign resident capital gain tax withholding (FRCGW) regime in Subdivision 14-D of Schedule 1 of the TAA imposes an obligation on a purchaser who acquires from a foreign resident a CGT asset consisting of: •         taxable Australian real property (TARP) •         an indirect Australian real property interest; or •         an option or right to acquire such property or interest. The withholding obligation generally applies to acquisitions made under contracts entered into on and from 1 July 2016 to Australian properties being sold for a contract price of $750,000 or more. The obligation consists of a requirement for the purchaser of a TARP from a foreign resident to withhold 12.5% of the first element of the cost base of the asset (usually the acquisition consideration), ignoring any financial benefits under earnout rights, and remit that amount to the Commissioner of Taxation at the time of acquisition, such as at settlement. Entitlement to credit of withholding payments The general rules about an entity's entitlement to a credit for an amount withheld from a withholding payment are contained in section 18-15 of Schedule 1 of the TAA.

Subsection 18-15(1) of Schedule 1 of the TAA states that an entity is entitled to a credit equal to the total of the amounts withheld from withholding payments made to the entity during an income year if an assessment has been made of the income tax payable, or an assessment has been made that no income tax is payable, by the entity for the income year. To the extent that an entity's entitlement to a credit referred to in section 18-15 of Schedule 1 of the TAA is in respect of an amount paid to the Commissioner under Subdivision 14-D of Schedule 1 of the TAA, TAA, treat the entitlement as arising in the income year in which the transaction causing that application of Subdivision 14-D of Schedule 1 of the TAA is recognised for income tax purposes for the entity. Application to your situation You did not obtain a clearance certificate in relation to the sale of the Property. The purchaser of the Property withheld 12.5% of the sale proceeds as FRCGW, being the FRCGW amount, which was remitted by the purchaser to the ATO. You have not lodged your income tax return in Australia for the ruling period.

You can claim a credit for the FRCGW amount after the notice of assessment for your income tax return for the ruling period has been issued and the conditions contained in section 18-15 of Schedule 1 to TAA are met.