Australian Federal Budget: non-resident CGT changes

By Amy Sexton, Robyn Walker & David Watkins

On 14 May 2024, Australian Treasurer Jim Chalmers delivered the 2024-25 Federal Budget. The Budget focuses on five priority areas identified by the Australian Government:

• Easing cost-of-living pressures
• Building more homes for Australians
• Investing in a Future Made in Australia
• Strengthening Medicare and the care economy
• Broadening opportunity and advancing equality

This can be contrasted against the budget priorities identified by the New Zealand Government in its March 2024 Budget Policy Statement:

• Delivering meaningful tax reductions to provide cost of living relief to New Zealanders 
• Identifying enduring savings across government departments and agencies
• Improving public services by shifting spending to higher-value areas and focusing on results
• Keeping tight control of government spending while funding a limited number of high-priority Government policy commitments and urgent cost pressures that cannot be funded through reprioritisation
• Developing a long-term, sustainable pipeline of infrastructure investments.

Expansion of non-resident capital gains tax (CGT)

One of the tax changes announced in the Australian Federal Budget that may affect New Zealanders is the expansion of the Australian non-resident CGT regime (Division 855 of the Income Tax Assessment Act 1997).

The budget announcement stated that the changes would “clarify and broaden the types of assets that foreign residents are subject to CGT on” and ensure that Australia can “tax foreign residents on direct and indirect sales of assets with a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents”. 

What are the current rules?

Generally, a capital gain made by a non-resident is disregarded for tax when the asset is not “taxable Australian property” (TAP). The two most relevant categories of TAP are:

• Taxable Australian real property, which currently includes:
  • Real property (including leases if the land is in Australia)
  • Mining, quarrying and prospecting rights (if the minerals etc. are situated in Australia)
• Indirect Australian real property interests being, broadly, non-portfolio membership interests (i.e., shares/units) if, broadly, more than half of the underlying asset value at the time of disposal relates to taxable Australian real property (referred to as the Principal Asset Test).

What are the changes?

The changes announced in the budget will apply to CGT events commencing on or after 1 July 2025 and will be designed to:

• Clarify and broaden the types of assets that non-residents are subject to CGT
• Amend the point-in-time Principal Asset Test to a 365-day look-back test period
• Require non-residents disposing of shares and other membership interests exceeding AUD20 million in value to notify the ATO before the transactions are executed.

The changes are designed to ensure that Australia can tax non-residents on direct and indirect sales of assets with a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents.

The reforms are said to also improve certainty for non-resident investors by aligning Australia’s tax law for non-resident capital gains more closely with OECD standards and international best practices.

At this stage our understanding is based on the details in the Australian Budget documents. More details about the changes are expected to be released in the exposure draft legislation as part of consultation before the legislative changes are implemented. Any New Zealand owners of assets in Australian should follow these developments if they intend selling assets after 1 June 2025.

Please get in touch with your local Deloitte advisor if you would like any further information on these changes.