Details unveiled for expansion of foreign resident CGT regime
The government has provided further details on its plans to strengthen the foreign capital gains tax regime.
Treasurer Jim Chalmers released details yesterday on the government's plans to bring the foreign resident CGT rules into line with OECD standards and international best practices.
Under the proposed measures, foreign residents will be taxed on capital gains from direct and indirect sales of assets with a close economic connection to Australian land or natural resources.
Treasury said this will bring the CGT outcome of foreign residents for Australia’s land and natural resources more in line with the tax treatment applicable to Australian residents.
The measure will apply to CGT events commencing on or after 1 July 2025 to:
• Clarify and broaden the types of assets that foreign residents are subject to CGT on.
• Amend the point-in-time principal asset test (PAT) to a 365-day testing period.
• Require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the Australian Taxation Office (ATO), in the approved form prior to the transaction being executed.
The consultation paper explained that Australia's foreign resident CGT regime currently taxes foreign residents on gains arising from the disposal of Australian real property, including indirect disposals.
However the scope of assets within Australia’s current rules does not cover the full range of assets over which Australia has jurisdiction to tax under Australia’s tax treaty policy and the OECD Model Tax Convention on Income and Capital, the paper explained.
"This has, in turn, required legislative amendments to address integrity issues and uncertainty since 2006," it said.
Treasury said the new measures will help address the ongoing uncertainty by clarifying and broadening the types of assets included in the CGT base for foreign residents.
The consultation paper said that assets regarded as having a close economic connection to Australian land or resources could include pastoral leases and licences such as infrastructure and machinery installed on land in Australia and Australian water entitlements in relation to land in Australia.
"It is appropriate to include these assets in the foreign resident CGT base because they derive their economic value from the use of Australian land and/or natural resources," the consultation paper.
"The taxation of these types of assets by Australia, where the associated land or minerals, petroleum or quarry materials are situated in Australia, is consistent with accepted international tax principles."
The proposed changes will also require foreign residents to notify the ATO when they plan to dispose of certain high‑value assets so that the ATO can make sure that tax is appropriately paid in Australia.
Increasing the withholding rate for foreign residential capital gains
In addition to the consultation paper, the government has released draft legislation with changes to the foreign resident capital gains withholding (FRCGW) regime.
The proposed legislation will increase the FRCGW rate for relevant CGT assets from 12.5 per cent to 15 per cent.
It also removes the current $750,000 threshold, before which withholding applies for transactions involving either taxable Australian real property or an indirect Australian real property interest that provides company title interests.
These changes will apply to acquisitions of relevant CGT assets made on or after the later of 1 January 2025 and the commencement of the measure.
"Building on the Government’s work to improve tax compliance, the reforms will make sure foreign residents who own property in Australia pay tax when they sell these properties," Chalmers said.
"These changes will ensure foreign residents comply with their tax obligations in Australia – and complement the Government’s initiatives to improve housing affordability for Australians."
