Notification threshold ‘too low’ for foreign resident CGT changes: KPMG
The big four firm is calling for the $20 million threshold for the new ATO notification requirement to be increased to $250 million.
KPMG has called for a number of changes to the government’s proposed reforms for strengthening the foreign resident capital gains (CGT) tax regime.
In late July, the government released a consultation paper exploring potential measures for strengthening the foreign resident CGT regime for ensuring foreign residents pay their fair share of tax in Australia.
As part of the proposed changes, the government plans to clarify and broaden the types of CGT assets that foreign residents are subject to CGT on and amend the point-in-time principal asset test (PAT) to a 365-day testing period.
Foreign residents who are disposing of shares and other membership interests exceeding $20 million in value will also be required notify the ATO in an approved form prior to the transaction being executed.
In a recent submission, KPMG has warned that the $20 million notification threshold is too low, given the compliance burden for investors and the increased administration. The firm said the threshold should instead be set at $250 million.
“The new ATO notification requirement should be implemented so that it does not unduly complicate deal execution and completion.
“To somewhat mitigate the burden on investors and the ATO, the minimum threshold should be increased from $20 million to $250 million.”
KPMG noted while the $20 million threshold has been identified to try and target transactions which present high risk to revenue, it is too low given the compliance burden on investors and the increased administration burden for the ATO.
“It is also not clear whether the relevant asset is the membership interests, which could be transacted offshore several levels up from the Australian investment, or the underlying Australian assets,” the submission said.
“If it is the former, there is more rationale for it being too low given the value of the offshore transaction would include all the target’s assets, which would often include significant foreign assets as compared to Australian assets.
“We recommend a $250 million threshold instead of $20 million. As an alternative, consideration could be given to aligning with the FIRB monetary thresholds.”
The government has proposed that the review period occur before the CGT event, which would typically be at the time the contract is signed or settlement, whichever is earlier.
KPMG said a more reasonable approach would be to have the review take place after the contract is settled, or before settlement, whichever is the earlier.
“This approach strikes a better balance between providing a level of flexibility in some instances to notify in what is already often a time constrained environment, and giving the ATO a sufficient amount of time prior to settlement to review the notification.”
The firm warned that the new process to notify the ATO is likely to result in a very high volume of transactions needing to be reviewed by the ATO, notwithstanding the precise monetary amount of the threshold.
“The ATO should give deep consideration as to how it will effectively manage this process with its available resources and ensure it is not overwhelmed,” it said.
“Uncertainty in transactions creates deal risk, and therefore, it must be a design outcome that any ATO notification and review period does not delay or otherwise compromise the ability for a transaction to be agreed and completed.”
KPMG said the completion of the notification by the vendor is likely to be a reasonable compliance burden, given the ATO will need to ensure it has enough information to make an assessment.
“We expect this should include, for example, the jurisdictions where the parties are tax resident, and Australian and New Zealand Standard Industrial Classification (ANZSIC) code(s) for the target’s Australian business, as well as information relevant to the CGT computation such as purchase price and PAT computation,” it added.
“The ATO should undertake public consultation on the proposed notification form in due course.”
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