Deferral of the foreign resident capital gains tax (CGT) regime changes
Deferral of the foreign resident capital gains tax (CGT) regime changes
In the Federal Budget 2023, the Government 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 were originally set to apply to asset sales from 1 July 2025. However, the Federal Budget 2025 announcement includes a deferral of the start date to the later of 1 October 2025, or the first 1 January, 1 April, 1 July or 1 October (i.e. the start of the first quarter) after the Act receives Royal Assent.
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.
Regarding changes to the CGT regime, the Government released a consultation paper in July 2024 containing three elements that will amend the rules as follows:
- Clarify and broaden the types of assets on which foreign residents are subject to CGT
- Amend the point-in-time principal asset test (PAT) to a 365-day testing period; and
- Require foreign residents to disclose transactions to the ATO 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
Although the consultation paper briefly addresses our previously expressed concerns regarding delays to commercial transactions, the review process heavily relies on the ATO taking the appropriate actions within the set review period. This process is good in theory; however, BDO is conscious that the ATO’s standard timeframes for delivery are often not adhered to, particularly where no case officer is assigned.
BDO notes that despite the consultation process completed in August 2024, the Government is yet to issue and consult further on draft legislation.