Capital gains tax new rules for non-residents: Practical implications
- wind back the liability of some non-residents to CGT; and
- expand the liability of others.
Non-residents need to plan their entry into the Australian market with the new provisions in mind.
The old rules
Before the changes, non-residents who disposed of CGT assets with the 'necessary connection' with Australia were liable to pay CGT. The types of assets that have the necessary connection include:
- Australian real property and
- shares or units in Australian companies or unit trusts,. (An exception applied if the asset was less than 10% of the either the shares in a publicly listed company, or the units in a public unit trust, on issue at any time during the 5 years before the disposal.)
New rule: A narrower asset range
The new rules replace the concept of 'necessary connection' with a narrower concept of 'taxable Australian property'. Taxable Australian property is defined to mean:
- Australian real property — including mining, quarrying and prospecting rights if the underlying materials are located in Australia;
- CGT assets used in carrying on a business through an Australian permanent establishment (known as a "PE");
- indirect interests in Australian real property; and
- rights or options to acquire any of the above.
Two significant types of assets which have been removed are shares and units in Australian companies and unit trusts.
New rule: tax no longer applies for certain periods
The old provisions taxed 100% of any gain derived from the sale of assets used in an Australian PE.
The new rules mean that tax is not payable on any gain made in a period in which the asset was not used in the Australian PE — for example: when a taxpayer sells the branch of a business but retains some of the CGT assets used in the branch and moves them offshore for use in overseas businesses.
New rule: Indirect interest in Australian real property caught
The new rules broaden the CGT net to catch any indirect interest that a non-resident has in Australian real property — even very indirect interests. Indeed, the rules enable the ATO to trace through all interposed entities to identify the interest — regardless of whether the entities are Australian resident entities.
However, there is some relief for passive investors as interests of less than 10% are ignored. For example, if a non-resident disposes of an interest in a land-holding entity (whether Australian or foreign), then CGT is payable if:
- the entity directly or indirectly holds Australian real property;
- the real property accounts for 50% or more of the entity's total assets; and
- the non-resident holds at least a 10% interest in the entity.
New entry to Australia: Plan a non-resident's structure
If a non-resident wishes to acquire assets other than real property in Australia, then it is preferable to do that through a structure that allows assets to be held directly by the non-resident (rather than through an Australian entity). For example, a resident who incorporates a company to acquire assets other than real property and sells the shares at a profit is required to pay CGT on the sale. However, a non-resident disposing of the same assets owned directly will not pay CGT.
Reorganise an existing non-resident's structure
A non-resident already operating in Australia should consider re-organising his or her existing structure to take advantage of the new provisions. In this regard, various CGT rollovers or the consolidation regime may be available.
The Government's attempt to tax entities holding indirect interests in Australian real property makes the ownership of these assets less attractive for non-residents. However, the wide-reaching effect of the new rules may be difficult to implement. That is:
- although the regulators may be able to enforce the indirect ownership rules when dealing with Australian land-holding entities,
- it will be harder for them to enforce such rules if a non-resident sells shares in a non-Australian entity that holds (either directly or indirectly) Australian land.
For more information, please contact Anna Tang at Maddocks on 03 9288 0555.