Consultation on foreign resident CGT rules commences

During this year’s Federal Budget, the Government announced measures to strengthen the foreign resident CGT regime. Division 855 of the ITAA97 currently states that foreign residents are liable for Australian CGT only when disposing of assets that are considered Taxable Australian Property (TAP), including Taxable Australian Real Property (TARP) and indirect non-portfolio interests if over 50 per cent of the market value is in TARP.  

On 23 July 2024, Treasury released a consultation paper proposing changes to enhance the integrity and certainty of the foreign resident CGT, ensuring foreign investors pay their fair share of tax in Australia. The measures are expected to apply to CGT events starting on or after 1 July 2025.

Broadening the CGT base     

The proposed changes aim to clarify and expand the scope of the CGT regime for foreign residents under Division 855, addressing uncertainties around the meaning of ‘real property’, especially in the renewable energy industry. These proposed changes will significantly impact foreign investors in Australian infrastructure, transport, energy, agriculture, and resources sectors. 

The consultation paper lists the following as examples of assets that may be considered to have a ‘close economic connection’ to Australian land, and therefore considered TARP:

• Leases or licenses to use land situated in Australia, including but not limited to pastoral leases;
• 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, for example: 
  • 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. 

• Options or rights to acquire one of the above assets or similar asset types with a close economic connection to Australian land and/or natural resources; and 
• Non-portfolio interest in entities where over 50 per cent of market value comes from these assets. 

While these changes provide additional certainty, especially for renewable energy assets, they will have a significant impact on non-residents. 

Extended testing period of the Principal Asset Test (PAT)

The testing period for determining whether an asset is taxable under the CGT regime will be extended to include the 365 days before the disposal of the indirect Australian real property interests. If the underlying entity derives more than 50 per cent of its market value from TARP at any time during the preceding 365 days, it will satisfy the PAT criteria and therefore be subject to CGT.  Currently, the PAT is determined only at the time of the CGT event. 

This change aims to improve the reliability of the test and reduce the ability to manipulate the asset composition. However, it may present challenges in obtaining historical market valuations over a one-year period. 

ATO notification requirements

The proposed measures require non-resident investors to notify the ATO of any transactions in advance, in particular those involving disposing of shares and other membership interests worth over $20 million. The vendor must submit this notification to the ATO in an approved form in advance of a set review period before the relevant CGT event or settlement (whichever is earlier).

Under this process, if the ATO disagrees with a vendor declaration (once notified), the ATO will be able to make a recommendation to the vendor and the purchaser that the vendor declaration be withdrawn, such that withholding applies to the transaction.

Currently, where a vendor declaration is provided to the purchaser, the purchaser is not required to withhold tax on the sale (unless the purchaser knows the declaration to be false). It is therefore viewed that in some cases foreign residents can incorrectly declare that the sale is not subject to CGT without the ATO’s knowledge.  

It is expected that this change may significantly delay transactions of value in excess of $20 million. Where the vendor is unable to give the ATO comfort that the membership interest is not an Indirect Australian Real Property Interest the purchaser will be obliged to withhold 12.5 per cent (set to increase to 15 per cent from 1 January 2025) from the purchase price. 

The takeaway

The proposed amendments to broaden the foreign resident CGT base will significantly affect foreign investment in new targeted Australian asset classes, especially in energy, agriculture and infrastructure sectors. 

Non-resident investors holding or planning to acquire affected assets should closely consider how these measures might impact their after tax returns. 

We encourage you to communicate any concerns, including the potential disincentive of investing in affected asset classes, during the consultation process so the Government can address these issues before implementing the changes. 

Our tax team is available to support you through this process and help navigate these new regulations when they come into effect.

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