Tax Laws Amendment (2006 Measures No. 1) Act 2006 (32 of 2006)

Schedule 1 Foreign source income exemptions for temporary residents

Part 1 Main amendments

Income Tax Assessment Act 1997

1 At the end of Division 768

Add:

Subdivision 768-R - Temporary residents

Guide to Subdivision 768-R

768-900 What this Subdivision is about

This Subdivision modifies the general tax rules for people in Australia who are temporary residents, whether Australian residents or foreign residents.

Generally foreign income derived by temporary residents is non-assessable non-exempt income and capital gains and losses they make are also disregarded for CGT purposes. There are some exceptions for employment-related income and capital gains on shares and rights acquired under employee share schemes.

Temporary residents are also partly relieved of record-keeping obligations in relation to the controlled foreign company and foreign investment fund rules.

Interest paid by temporary residents is not subject to withholding tax and may be non-assessable non-exempt income for a foreign resident.

Table of sections

Operative provisions

768-905 Objects

768-910 Income derived by temporary resident

768-915 Certain capital gains and capital losses of temporary resident to be disregarded

768-920 Capital gains and losses on employee shares and rights where taxation of discount not deferred

768-925 Notional gain or loss

768-930 Adjustment to notional gain or loss

768-935 Adjustment for share or right acquired under employee share scheme

768-940 Adjustment for derived share

768-945 Amending assessment to take account of effect on capital gain or loss of recalculating discount

768-950 Individual becoming an Australian resident

768-955 Temporary resident who ceases to be temporary resident but remains an Australian resident

768-960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules

768-965 Exemption of temporary resident from taxation in respect of foreign investment fund income

768-970 Modification of rules for accruals system of taxation of certain non-resident trust estates

768-975 Calculation of beneficiary's share of net income of non-resident trust estate

768-980 Interest paid by temporary resident

Operative provisions

768-905 Objects

The objects of this Subdivision are to:

(a) provide *temporary residents with tax relief on most foreign source income and capital gains; and

(b) relieve the burdens associated with complying with certain record-keeping obligations and interest withholding tax obligations.

768-910 Income derived by temporary resident

(1) The following are *non-assessable non-exempt income:

(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source if you are a *temporary resident when you derive it;

(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it.

This subsection has effect subject to subsections (3) and (5).

Note: A capital gain or loss you make may be disregarded under section 768-915.

(2) For the purposes of paragraph (1)(b):

(a) if you have statutory income because a particular circumstance occurs, you derive the statutory income at the time when the circumstance occurs; and

(b) if you have statutory income because a number of circumstances occur, you derive the statutory income at the time when the last of those circumstances occurs.

Exception to subsection (1)

(3) However, the following are not *non-assessable non-exempt income under subsection (1):

(a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a *temporary resident;

(b) your *statutory income (other than a *net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident;

(d) an amount that, but for subsection (1), would be included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936.

Note: This subsection only makes an amount not non-assessable non-exempt income under subsection (1). It does not prevent that amount from being non-assessable non-exempt income under some other provision of this Act or the Income Tax Assessment Act 1936.

Section 26AAC employee share schemes

(4) This subsection applies if:

(a) an amount would otherwise be included in your assessable income under section 26AAC of the Income Tax Assessment Act 1936 (about shares and rights acquired by employees); and

(b) the applicable time mentioned in subsection 26AAC(15) of that Act for the relevant *share occurs while you are a *temporary resident.

(5) If subsection (4) applies, the amount is *non-assessable non-exempt income to the extent to which you acquired the relevant *share under a scheme for the acquisition of shares by employees in respect of, or for or in relation (directly or indirectly) to:

(a) any employment you undertook outside Australia; or

(b) any services you provided outside Australia;

prior to becoming a *temporary resident.

(6) Subsection (5) does not limit paragraph (1)(b).

768-915 Certain capital gains and capital losses of temporary resident to be disregarded

A *capital gain or *capital loss you make from a *CGT event is disregarded if:

(a) you are a *temporary resident when, or immediately before, the CGT event happens; and

(b) you would not make a capital gain or loss from the CGT event if you were a foreign resident when, or immediately before, the CGT event happens.

Note: Division 136 deals with capital gains and capital losses by foreign residents.

768-920 Capital gains and losses on employee shares and rights where taxation of discount not deferred

When this section applies

(1) This section applies to a *share or right if:

(a) you *acquire the share or right under an *employee share scheme; and

(b) you engage in employment, or render services, that affect the holding or acquisition of the shares or rights while you are a *temporary resident; and

(d) either:

(i) the share or right is not a *qualifying share or *qualifying right; or

(ii) the share or right is a qualifying share or qualifying right and you have made an election under section 139E of the Income Tax Assessment Act 1936 covering the share or right; and

(e) a *CGT event happens in relation to the share or right; and

(f) if the CGT event is CGT event I1 - you are not a temporary resident immediately before the event happens; and

(g) you would make a *capital gain or *capital loss from the CGT event, and the capital gain or capital loss would not be disregarded, if you were an Australian resident (but not a temporary resident) when the CGT event happens; and

(h) this section has not previously applied to you in relation to a CGT event in relation to the share or right.

Note: Paragraph (a) - section 139DQ of the Income Tax Assessment Act 1936 applies for the purposes of this Subdivision to treat a matching share or right issued as part of a 100% takeover or restructure as a continuation of the share or right it matches.

(2) This section also applies to a *share (the derived share ) if:

(a) you *acquire a right (the original right ) under an *employee share scheme; and

(b) you engage in employment, or render services, that affect the holding or acquisition of the original right, or the derived share, while you are a *temporary resident; and

(d) the derived share does not have the *necessary connection with Australia; and

(e) either:

(i) the original right is not a *qualifying right; or

(ii) the original right is a qualifying right and you have made an election under section 139E of the Income Tax Assessment Act 1936 covering the original right; and

(f) a *CGT event happens in relation to the derived share; and

(g) if the CGT event is CGT event I1 - you are not a temporary resident immediately before the event happens; and

(h) you would make a *capital gain or *capital loss from the CGT event, and the capital gain or capital loss would not be disregarded, if you were an Australian resident (but not a temporary resident) when the CGT event happens; and

(i) this section has not previously applied to you in relation to the original right or the derived share.

(3) To avoid doubt, paragraph (1)(e) or (2)(f) applies:

(a) even if you are not a *temporary resident when the *CGT event happens; and

(b) whether you are an Australian resident or a foreign resident when the CGT event happens.

Capital gain or loss

(4) If you are a *temporary resident or a foreign resident when the *CGT event happens, you make a *capital gain or *capital loss from the CGT event.

Note: If you are an Australian resident (but not a temporary resident) when the CGT event occurs, neither Division 136 nor section 768-915 prevents you having a capital gain or capital loss.

(5) Subsection (4) has effect despite Division 136 and section 768-915.

Amount of capital gain or capital loss for temporary residents and foreign residents

(6) If you are a *temporary resident or a foreign resident when the *CGT event happens, the amount of the *capital gain or *capital loss is the amount of your adjusted notional gain or loss worked out under subsection (9).

Amount of capital gain or capital loss for Australian residents

(7) If you are an Australian resident (but not a *temporary resident) when the *CGT event happens, the amount of the *capital gain or *capital loss is the sum of:

(a) the amount that would be the amount of your capital gain or capital loss if this section did not apply to you; and

(b) the amount of your adjusted notional gain or loss worked out under subsection (9).

Example: George, a New Zealander, is granted shares (with a total market value at the time of $100,000) under an employee share scheme on 20 January 2006. He comes to Australia as a temporary resident on 1 January 2007 and completes the rest of the employment to which the shares relate in Australia. George elects to have the discount assessed in that income year. He then ceases to be a temporary resident but remains an Australian resident on 8 May 2008. At that time the shares have a market value of $80,000. George disposes of the shares on 30 June 2009 for $115, 000. George's capital gain for the purpose of paragraph (a) would be $35,000. Assume that the amount of the loss that accrued up to 8 May 2008 that is to be counted for the purpose of paragraph (b) is $9,000. For the year ending 30 June 2009, George would, as a result of subsection (7), make a capital gain of $26,000 (being $35,000 less $9,000).

(8) If subsection (7) applies to the *CGT event, subsections 136-40(3) and 768-955(3) do not apply for the purposes of applying Division 115 in relation to the CGT event.

Adjusted notional gain or loss

(9) To work out your adjusted notional gain or loss:

(a) work out your notional gain or loss using section 768-925; and

(b) adjust your notional gain or loss using sections 768-930, 768-935 and 768-940.

768-925 Notional gain or loss

(1) Your notional gain or loss is the *capital gain or *capital loss you would have had in relation to the *CGT event if, for the whole of the period set by subsections (2) and (3), you:

(a) had been an Australian resident; and

(b) had not been a *temporary resident.

(2) The period starts:

(a) in the case of section 768-920 applying to the *share or right in relation to which the *CGT event happens because of subsection 768-920(1):

(i) if the share or right was acquired from an *employee share trust - when you first acquired a beneficial interest in the share or right; or

(ii) if subparagraph (i) does not apply - when you *acquired that share or right; and

(b) in the case of section 768-920 applying to the *share in relation to which the *CGT event happens because of subsection 768-920(2):

(i) if the share was acquired from an *employee share trust - when you first acquired a beneficial interest in the original right; or

(ii) if subparagraph (i) does not apply - when you *acquired the original right.

(3) The period ends when the *CGT event happens.

(4) If you are an Australian resident (but not a *temporary resident) when the *CGT event happens, your notional gain or loss is reduced by the amount of the *capital gain or *capital loss that you would have made in relation to the *CGT event if section 768-920 did not apply to you.

768-930 Adjustment to notional gain or loss

(1) If section 768-920 applies to the *share or right in relation to which the *CGT event happens because of subsection 768-920(1), adjust your notional gain or loss by:

(a) firstly, applying the factor worked out under subsection 768-935(1), (2) or (3) to the amount of your notional gain or loss; and

(b) secondly, applying the factor worked out under subsection 768-935(4) to the amount worked out under paragraph (a).

(2) If section 768-920 applies to the *share in relation to which the *CGT event happens because of subsection 768-920(2), adjust your notional gain or loss by:

(a) firstly, applying the factor worked out under subsection 768-940(1), (2) or (3) to the amount of your notional gain or loss; and

(b) secondly, applying the factor worked out under subsection 768-940(4) to the amount worked out under paragraph (a).

768-935 Adjustment for share or right acquired under employee share scheme

(1) If:

(a) the *CGT event happens on or after the *cessation time for the share or right; and

(b) when, or immediately before, the CGT event happens you are either:

(i) a foreign resident; or

(ii) an Australian resident who is a temporary resident;

the factor to be applied for the purposes of paragraph 768-930(1)(a) is:

Days before cessation time / Days before CGT event

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you *acquired the *share or right or, if you acquired the share or right from an *employee share trust, on the day on which you first acquired a beneficial interest in the share or right; and

(b) ends on the *cessation time for the share or right.

days before CGT event is the number of days in the period that:

(b) ends on the day on which the *CGT event happens.

(2) If:

(a) the *CGT event happens on or after the *cessation time for the share or right; and

(b) when, or immediately before, the CGT event happens you are an Australian resident (but not a *temporary resident);

the factor to be applied for the purposes of paragraph 768-930(1)(a) is:

Days before cessation time / Days before ceasing to be a temporary resident

where:

days before cessation time is the number of days in the period that:

(b) ends on the *cessation time for the share or right.

days before ceasing to be a temporary resident is the number of days in the period that:

(b) ends on the day on which you cease to be a *temporary resident.

(3) The factor to be applied for the purposes of paragraph 768-930(1)(a) is 1 if:

(a) the CGT event happens before the *cessation time for the *share or right; or

(b) you became an Australian resident who was not a *temporary resident before the cessation time for the share or right.

(4) The factor to be applied for the purposes of paragraph 768-930(1)(b) is:

Assessabke part of discount / Discount

where:

assessable part of discount is the amount of the discount that:

(a) was included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936 in relation to the *share or right; or

(b) would have been included in your assessable income under that Division in relation to the share or right if subsection 139BA(2) of that Act were disregarded.

discount is the amount of the discount.

768-940 Adjustment for derived share

(1) If:

(a) the *CGT event happens on or after the *cessation time for the original right; and

(b) when, or immediately before, the CGT event happens you are either:

(i) a foreign resident; or

(ii) an Australian resident who is a *temporary resident;

the factor to be applied for the purposes of paragraph 768-930(2)(a) is:

Days before cessation time / Days before CGT event

where:

days before cessation time is the number of days in the period that:

(a) starts on the day on which you *acquired the original right or, if you acquired the *share from an *employee share trust, on the day on which you first acquired a beneficial interest in the original right; and

(b) ends on the *cessation time for the original right.

days before CGT event is the number of days in the period that:

(b) ends on the day on which the *CGT event happens.

(2) If:

(a) the *CGT event happens on or after the *cessation time for the original right; and

(b) when, or immediately before, the CGT event happens you are an Australian resident (but not a *temporary resident);

the factor to be applied for the purposes of paragraph 768-930(2)(a) is:

Days before cessation time / Days before ceasing to be a temporary resident

where:

days before cessation time is the number of days in the period that:

(b) ends on the *cessation time for the original right.

days before ceasing to be a temporary resident is the number of days in the period that:

(b) ends on the day on which you cease to be a *temporary resident.

(3) The factor to be applied for the purposes of paragraph 768-930(2)(a) is 1 if:

(a) the *CGT event happens before the *cessation time for the original right; or

(b) you became an Australian resident who was not a *temporary resident before the cessation time for the original right.

(4) The factor to be applied for the purposes of paragraph 768-930(2)(b) is:

Assessable part of discount / Discount

where:

assessable part of discount is the amount of the discount that:

(a) was included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936 in relation to the original right; or

(b) would have been included in your assessable income under that Division in relation to the original right if subsection 139BA(2) of that Act were disregarded.

discount is the amount of the discount.

768-945 Amending assessment to take account of effect on capital gain or loss of recalculating discount

(1) This section applies if:

(a) an amount is included in your assessable income, or you have a net capital loss, for a particular income year; and

(b) that amount is reduced, or increased, because of a change in the extent (if any) to which any of the following provisions of the Income Tax Assessment Act 1936 apply in relation to the amount during a subsequent income year:

(i) section 23AF;

(ii) section 23AG;

(iii) subsection 139B(1A).

(2) In paragraph (1)(b):

(a) the reference to an amount being reduced includes a reference to the amount being reduced to a nil amount; and

(b) the reference to an amount being increased includes a reference to the amount being increased from a nil amount.

(3) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment to take account of the effect that the reduction or increase has on the determination of the amount of a *capital gain or *capital loss under subsection 768-920(6) or (7).

(4) If section 768-920 applies to the *share or right in relation to which the *CGT event occurs because of subsection 768-920(1), the amendment must be made before the end of the period of 4 years starting immediately after the income year during which the period of employment or service relating to the *acquisition of the share or right ends.

(5) If section 768-920 applies to the *share or right in relation to which the *CGT event occurs because of subsection 768-920(2), the amendment must be made before the end of the period of 4 years starting immediately after the income year during which the period of employment or service relating to the *acquisition of the original right ends.

768-950 Individual becoming an Australian resident

Section 136-40 does not apply to your becoming an Australian resident if you are a *temporary resident immediately after you become an Australian resident.

768-955 Temporary resident who ceases to be temporary resident but remains an Australian resident

(1) If you are a *temporary resident and you then cease to be a temporary resident (but remain, at that time, an Australian resident), there are rules relevant to each *CGT asset that:

(a) you owned just before you ceased to be a temporary resident; and

(b) does not have the *necessary connection with Australia; and

(2) The first element of the *cost base and *reduced cost base of the asset (at the time you cease to be a *temporary resident) is its *market value at that time. This subsection has effect despite Subdivision 130-D.

(3) Also, Parts 3-1 and 3-3 apply to the asset as if you had *acquired it at the time you ceased to be a *temporary resident.

(4) This section does not apply to a *share or right if:

(a) it is a *qualifying share or a *qualifying right; and

(b) you have not made an election under section 139E of the Income Tax Assessment Act 1936 covering the share or right; and

768-960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules

For the purposes of Part X of the Income Tax Assessment Act 1936 (which deals with the attribution of income in respect of controlled foreign companies), you are taken not to be an *attributable taxpayer in relation to a *CFC or *CFT at any time you are a *temporary resident.

768-965 Exemption of temporary resident from taxation in respect of foreign investment fund income

If you are a *temporary resident at the end of an income year, section 529 and Division 22 of Part XI of the Income Tax Assessment Act 1936 do not apply to you in relation to a *FIF or *FLP in respect of the notional accounting period of the FIF or FLP that ends in that income year.

768-970 Modification of rules for accruals system of taxation of certain non-resident trust estates

At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of section 102AAZD of the Income Tax Assessment Act 1936.

768-975 Calculation of beneficiary's share of net income of non-resident trust estate

At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of subsection 96C(6) of the Income Tax Assessment Act 1936.

768-980 Interest paid by temporary resident

Interest that is paid by a *temporary resident:

(a) is an amount to which section 128B (liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply; and

(b) is *non-assessable non-exempt income if the interest is:

(i) *derived by a foreign resident; and

(ii) is not derived from carrying on *business in Australia at or through a *permanent establishment in Australia.

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