Tightening of the foreign resident capital gains tax regime
The Government has announced that the foreign resident capital gains tax (CGT) regime will be amended to:
- clarify and broaden the types of assets on which foreign residents are subject to CGT
- amend the point-in-time principal asset test to a 365-day testing period, and
- require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the Australian Taxation Office (ATO) prior to the transaction being executed.
The current foreign resident CGT regime broadly seeks to tax foreign residents on three types of assets – taxable Australian real property, indirect Australian real property interests (i.e. shares and other membership interests in entities that predominantly hold Australian real property) and assets used in an Australian permanent establishment.
What is or is not taxable Australian real property has been subject to debate since these rules were introduced in 2006. Whilst it is clear that a direct disposal of traditional Australian real estate should be subject to CGT, the ambiguity historically related to non-traditional real estate and infrastructure assets. In addition, the valuation of the different types of assets that may make up these types of investments (for example, fixtures or chattels) has also proven to be an area of debate between taxpayers and the ATO. The announcement to broaden the types of assets held by foreign residents subject to Australian CGT to include those “with a close economic connection to Australian land” is clearly aimed at removing an ambiguity of the types of assets captured or debate around valuations. We expect the measure is aimed at capturing assets such as water rights, pastoral leases and potentially mobile towers and renewable energy assets.
With respect to indirect Australian real property interests, the current provisions seek to determine whether the entity predominantly holds Australia real property at the time of disposal. The proposed amendments will replace this with a 365-day test period, presumably as an additional anti-avoidance measure.
We understand that the new ATO notification process highlighted in the Budget will impact disposals of membership interests exceeding $20 million in value by foreign residents where the foreign resident vendor is declaring and self-assessing that the membership interest is not an “indirect Australian real property interest”. Whilst there is no mention of a time frame for this notification, the ATO will require sufficient time to review and approve the tax outcomes on a proposed sale, and hence this will need to be factored into deal timelines.
The amendments are proposed to apply to CGT events commencing on or after 1 July 2025. There does not appear to be any grandfathering for existing assets which will likely mean that assets previously not subject to CGT may now be brought into the Australian tax net. The Government has indicated that it intends to consult on the implementation of this measure later this year.
These measures are in addition to those announced in the 2023-24 Mid-Year Economic and Fiscal Outlook. Those amendments, which will apply from 1 January 2025, will increase the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reduce the withholding threshold from $750,000 to $0.