Changes to the foreign resident capital gains tax regime
Changes to the foreign resident capital gains tax regime
The Government has announced changes to the foreign resident CGT regime in a bid to raise revenue and improve compliance from those who do not ordinarily reside in Australia. The new rules will apply to asset sales from 1 July 2025.
Australia’s CGT regime currently allows a foreign resident to disregard a capital gain or loss made on selling an asset, unless the CGT asset is taxable Australian real property (TARP). TARP includes a direct or indirect interest in Australian land, an asset used in carrying on a business through a permanent establishment in Australia, or rights and options in respect of those assets.
An ‘indirect Australian real property interest’ includes a significant interest (10% or more) in an entity whose underlying value is principally derived from Australian real property. Importantly, the principal asset test is used to determine whether an entity’s underlying value is principally derived from Australian real property and is satisfied when the sum of the market values of an entity’s assets that are TARP exceed the sum of the market value of the assets that are non-TARP.
Interestingly, the Government has stated that it intends to clarify and broaden the types of assets that foreign residents are subject to CGT on as well as amending the principal asset test to a 365-day test. At present, the principal asset test is examined based on asset values at a point in time. Unfortunately, no further details have been disclosed within the Budget.
Finally, it was also announced that foreign residents would be required to disclose to the ATO transactions that involve shares or other interests with a value of $20 million or more prior to the execution of the transaction.
The overarching aim of these measures is to ensure foreign residents are assessed on transactions that have a close economic connection to Australian land by ensuring the ATO knows about the transaction in real time.
BDO comment
Expanding the types of assets that are captured within the regime is a double-edged sword. While it collects more revenue, in the long-term, foreign investors will take the increased cost of investing in Australia into account when making capital allocation decisions.
Whilst changing the principal asset test to a 365-day test is good in theory, its application could be difficult in practice and increase the cost of compliance for taxpayers.
Consulting with the ATO prior to the completion of a transaction sounds positive in theory, but we have major concerns with how this would occur in practice. Whilst early engagement with the ATO and certainty over a tax position is always positive, being required to obtain ATO sign off prior to the execution of a transaction may significantly delay business activities.
The lack of detail in this announcement needs to be remedied rapidly. Appropriate consultation will be required to ensure the amendments deliver a benefit that is also practical for taxpayers to apply.