Foreign resident CGT regime – changes to be adopted
Announced in the 2024 Federal Budget as an integrity measure, are changes to the foreign resident CGT regime that will ensure foreign residents pay their fair share of tax.
Commencing from 1 July 2025, these reforms aim to provide certainty to foreign investors by aligning Australian tax law closely with the OECD standards and international best practice.
Types of assets
A foreign resident’s liability for CGT is based whether the relevant asset is taxable Australian property (TAP). As per s 855-15 the following assets are a TAP:
Taxable Australian real property
an indirect interest in Australian real property
a business asset of a permanent establishment in Australia
an option or right to acquire any of the CGT assets listed above
a CGT asset that is deemed to be Australian taxable property where a taxpayer on ceasing to be an Australian resident, makes an election under s 104-165.
The proposed measure will look to clarify and broaden the types of assets that the foreign residents are subject to, details of which should be released in the near future.
Principal asset test
The principal asset test determines whether the membership interest of a foreign resident in another entity (the test entity) is above 50% of the value of the test entity’s total assets attributable to Australian real property at the point-in-time when the CGT event occurs. Under the announced measures, this test will be changed to a 365-day testing period.
ATO to be notified of high value transactions
As per the Federal Budget announcement, foreign residents will be required to notify the ATO each time they dispose of shares and other membership interests exceeding $20 million in value, prior to the transaction being executed.
Foreign resident CGT withholding
A 12.5% non-final withholding tax obligation applies to the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor. The CGT withholding is calculated on the first element of the cost base of the CGT asset, payable to the Commissioner at the time of acquisition (settlement).
Also announced in the Federal Budget, is a new ATO notification process which will oversee transactions that should be liable to the CGT withholding tax where a vendor self-assesses their sale as non-taxable real property. This will improve oversight and compliance with the foreign resident CGT withholding rules.
Next steps
The ATO will be scrutinising foreign residents who become liable to pay CGT as the information related to CGT events falling within the expanded definitions and stringent tests filters through to the ATO under various data matching and monitoring programs.
Please free to contact our office should you have any queries in relation to these announcements.
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