Australia's 2024/25 federal budget proposes to ensure foreign residents pay capital gains tax (CGT) on all direct and indirect sales of assets with a 'close economic connection' to Australian land.
The budget includes significant amendments to the foreign resident CGT regime, with effect for CGT events from 1 July 2025. The current point-in-time 'principal asset test', which examines whether more than 50 per cent of the market value of assets are interests in Australian real property, is to be broadened to a 365-day testing period, probably looking at the average values over 365 days.
Also, foreign residents disposing of more than AUD20 million worth of shares or similar 'membership interests' will have to give advance notice to the Australian Tax Office (ATO).
According to the ATO, the measures will bring CGT on foreign residents into close line with the tax treatment that already applies to Australian residents. The new disposal notification process will improve oversight and compliance with the foreign resident CGT withholding rules, where a vendor self-assesses that their sale is not taxable real property, says the ATO. It also claims the reforms will improve certainty for foreign investors by aligning Australia's tax law for foreign resident capital gains more closely with OECD standards and international best practice.
However, according to law firm K&L Gates, the claim of consistency with the OECD approach is unclear, as there does not appear to be an OECD-standard approach. Moreover, the obligation to pre-notify the ATO of disposals over AUD20 million ‘is presumably designed to target disposals that the [ATO]
currently think are escaping the tax net’ is, the firm says, ‘likely to complicate deal execution and completion.’
The reference to taxing assets with 'close economic connection to Australian land' is not yet clear, but it will likely result in an expansion of the instances where foreign residents are subject to tax on disposal of assets, added K&L Gates. Currently, CGT applies principally to entities with a permanent establishment in Australia, interests in Australian real property itself or a majority value attributable to Australian real property interests.
The government will issue a consultation paper to further outline the proposed measures, which are expected to increase receipts by AUD600 million and increase payments by AUD8 million over the over the five years from 2023/24 onwards.
'Despite the significance of these proposals, there is a great deal of detail which needs to be provided', commented law firm Clayton Utz. 'Taxpayers will be keen to understand whether the expansion of the asset categories looks to capture additional types of interests referable to companies and trusts...and if the expansion also seeks to cover categories of assets that are treated in the same way as land or interests in land'. This might include other assets which are not interests in land, such as licences, it said.
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