Non-residents need to plan their entry into the Australian market with the new provisions in mind.Anna Tang
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:
The new rules replace the concept of 'necessary connection' with a narrower concept of 'taxable Australian property'. Taxable Australian property is defined to mean:
Two significant types of assets which have been removed are shares and units in Australian companies and unit trusts.
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.
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:
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:
For more information, please contact Anna Tang at Maddocks on 03 9288 0555.
Leigh is a partner in the Maddocks Tax & Revenue team.
Leigh regularly provides advice on:
His advice covers both direct and indirect tax considerations.
Leigh advises Australian and multinational companies, high net worth individuals, accountants and financial advisers on all areas of taxation law.
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For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of their team.