On 23 July 2024, the Australian Treasury released the following documents:
The paper follows the government’s announcement in the 2024–25 Budget to broaden the application of the capital gains tax (CGT) regime to foreign residents. This measure is estimated to increase receipts by AUD 600 million over the five years from 2023–24.
In addition, the exposure draft on foreign resident CGT withholding tax changes follows the government’s announcement in the Mid-Year Economic and Fiscal Outlook 2023-24. This measure is estimated to increase receipts by AUD 150 million over the four years to 2026–27.
Strengthening the foreign resident CGT regime
As a general position, a capital gain made by a non-resident is disregarded except where the relevant asset is “taxable Australian property” which includes (i) taxable Australian real property (TARP) and (ii) certain shares and other interests in entities that own TARP, referred to as indirect Australian real property interests (IARPI).
The paper comprises three complementary elements which apply to CGT events on or after 1 July 2025:
- Clarifying and broadening the types of assets to which foreign residents are subject to CGT;
- Amending the IARPI point-in-time principal asset test (PAT) to a 365-day look-back testing period; and
- Requiring foreign residents disposing of shares and other membership interests exceeding AUD 20 million in value to notify the Australian Taxation Office (ATO).
Clarifying and broadening the types of assets included in the CGT base
The proposed changes aim to address “ongoing uncertainty by clarifying and broadening” the types of land-related assets on which foreign residents are subject to CGT. The objective is stated as being to ensure Australia can tax gains on assets that have a close economic connection to Australian land and/or natural resources, while balancing broader foreign investment considerations.
The paper lists the following types of assets with a close economic connection to Australian land and/or natural resources:
- Leases or licenses to use land situated in Australia, including (but not limited to) pastoral leases and licenses, e.g., an agreement to lease land that is used in a manner that gives rise to the creation of emissions permits;
- Australian water entitlements in relation to land situated in Australia;
- Infrastructure and machinery installed on land situated in Australia, including land subject to a mining, quarrying, or prospecting right of an entity, e.g.:
- Energy and telecommunications infrastructure, such as wind turbines, solar panels, batteries, transmission towers, transmission lines, and substations;
- Transport infrastructure, such as rail networks, ports, and airports; and
- Heavy machinery installed on land for use in mining operations, such as mining drills and ore crushers;
- An option or right to acquire one of the above assets (or similar asset types with a close economic connection to Australian land and/or natural resources); and
- A non-portfolio membership interest in an entity where more than 50% of the underlying entity’s market value is derived from the above assets.
It is expected that the current rules relating to TARP and IARPI will be amended to include the additional assets as set out above. No consultation questions are raised with respect to the above.
Economic interests in TARP and other integrity matters
The paper poses two consultation questions relating to the application of the CGT regime in respect of “economic interests” in TARP. This is directed at how the Australian tax rules should deal with interests such as total return swaps which may generate an economic return with reference to TARP but do not necessarily involve the acquisition and disposal of TARP.
Extending the testing period for the PAT
The PAT in the IARPI definition currently operates at a point-in-time (the time of the CGT event). This will be extended to also require a look-back testing over the preceding 365 days.
That is, if more than 50% of the underlying asset value of the entity is attributable to TARP at the time of the CGT event or at any time during the preceding 365 days, the interest in the entity will satisfy the PAT requirement in the IARPI definition. This will more closely align the Australian tax law test with the equivalent treaty concepts in recent treaties.
No consultation questions are raised with respect to the above.
ATO notification of non-IARPI vendor declarations
Purchasers of TARP and IARPI from foreign resident vendors are required to withhold and remit to the ATO 12.5% (increasing to 15%) of the transaction proceeds. Currently, a purchaser does not need to withhold if the foreign resident has provided a vendor declaration to the purchaser that the membership interests to be disposed of are not IARPI, and the purchaser does not know this vendor declaration to be false at the time it is provided.
The paper addresses the proposal to introduce an ATO notification process for non-IARPI vendor declarations, for transactions with a value of greater than AUD 20 million. The paper proposes that if the ATO “disagrees with a vendor notification,” the ATO can “recommend” to the vendor and purchaser that the non-IARPI vendor declaration be “withdrawn.”
The objective is to give visibility to the ATO of such transactions, presumably so that the ATO can potentially disrupt the ordinary way in which the transaction is otherwise proceeding, where the ATO considers that the disposal may involve a disposal of IARPI.
In the absence of the provision of detailed information to the ATO, it is not clear how the ATO can form a view as to whether the non-IARPI vendor declaration is appropriate. Further, it is not clear how the proposed compliance process will sit alongside the normal conduct and completion of in-scope transactions.
Five consultation questions are raised with respect to this matter.
Improving the foreign resident capital gains withholding tax regime
The foreign resident capital gains withholding (FRCGW) tax regime imposes a non-final withholding obligation on the purchaser of TARP and IARPI acquired from a foreign resident vendor. Currently, the FRCGW does not apply where the market value of TARP or IARPI (relating to company title interests) is less than AUD 750,000.
The measure would:
- Increase the withholding rate from 12.5% to 15%; and
- Remove the AUD 750,000 threshold.
These changes are expected to apply to acquisitions of relevant CGT assets made on or after 1 January 2025.
