CGT & Non-Residents: "All New" Rules ... and good news

Non-Residents of Australia who hold taxable Australian assets will be pleased to hear that the scope of Australia's CGT rules is soon to reduce. Their holdings in resident and non-resident investment vehicles will be taxable only if more than 50% of the vehicle's assets are attributable to land.
 

Who can benefit from the change?

When introduced, the new rules will apply to all forms of non-residents, be they individuals, companies, trusts or partnerships. (However, the definition of a 'non-resident' will stay the same.

Changing the basis on which CGT is imposed

The basis of CGT on non-residents will change from the current 9 categories of CGT assets which have the necessary connection with Australia to incur the tax (sec.136-25 of ITAA97).

The new basis will be whether the asset is "Taxable Australian Property". The new rules focus on a non-resident's real property and mining interests as the basis for levying tax.

What is "Taxable Australian Property"?

'Taxable Australian property' (TAP) will broadly include:

  • direct and indirect interests in Australian real property (such as land);
  • business assets of an overseas company's Australian branch; and
  • an option or right to acquire such assets.

All assets that are not TAP will not trigger CGT implications when dealt with by a non-resident.

What "indirect interests" will be taxed in a non-resident's hands?

A non-resident will have an indirect interest in Australian real property if it holds, through a resident or non-resident entity:

  • greater than 10% of the underlying Australian real property (a 'non-portfolio interest'); and
  • 50% or more of the entity's total assets (by market value) relative to Australian real property ('principal asset test').

Are there any transitional provisions?

Capital profits accumulated by non-residents before the introduction of the new rules will not be grandfathered. Accordingly, book profits generated on assets previously within Australia's CGT net which move outside the net under the new rules will not be subject to CGT.

Practical implications

The rules enhance the integrity of Australia's CGT base — for example, by extending Australia's CGT rules to foreign company shares if the foreign company passes the principal asset test and a non-resident holds a non-portfolio interest.

Some of the key practical implications of the new rules are set out below:

  1. Australian listed public company shares will only be subject to CGT if a non-resident (individually or with associates) holds a non-portfolio interest (and the company passes the principal asset test).
  2. Australian private company shares will only be subject to CGT if a non-resident (individually or with associates) holds a non-portfolio interest (and the company passes the principal asset test).
  3. Shares in a non-resident company (public or private) will be subject to CGT if a non-resident (individually or with associates) holds a non-portfolio interest (and the non-resident company passes the principal asset test).
  4. Units in a unit trust (resident or non-resident) will be subject to CGT if a non-resident (individually or with associates) holds a non-portfolio interest (and the unit trust passes the principal asset test).
  5. Mining, quarrying and prospecting rights in respect of minerals situated in Australia will be taxable when held by a non-resident. When these rights are held via an entity (resident or non-resident), they will be subject to CGT where the non-resident (individually or with associates) holds a non-portfolio interest (and the company passes the principal asset test).

Capital account only

Importantly, the new rules only apply to gains and losses generated on capital account. If a non-resident deals in an asset and generates a profit or loss on revenue account, that profit or loss is not dealt with by CGT.

Rules not yet law

The new rules have not yet become law. Keep an eye on the ATO website (www.ato.gov.au) which will confirm their introduction. Otherwise contact Michael Taylor-Sands or Julian Smith at Maddocks on (03) 9288 0555.