A recent tax case before the Federal Court serves as a reminder that a foreign resident can be liable for capital gains tax (CGT) on gains made on certain assets they own in Australia – albeit, in that case, the taxpayer was a foreign corporation that made a gain of some $950m in respect of the sale of shares in an Australian company that had big interests in Australian electricity assets.
However, the principles are the same – namely, that a foreign resident (whether an individual, company or trust) will be liable for Australian CGT in respect of basically the following assets:
- Real property in Australia (including leases over such land)
- Assets used to carry on a business in Australia via a permanent establishment, and
- Certain share or trust interests in Australian companies or trusts.
In relation to shares or trust interests, a foreign resident will broadly only be liable for CGT if they own more than 10% of the shares or trust interests and where more than 50% of the assets owned by the company or trust (by market value) are real property in Australia.
The very nature of this test can make it hard to apply as these relevant interests may change over time and may be hard to measure. And as in that recent Federal Court case, there may also be issues of what is real property in Australia (as a matter of law and fact)!
Nevertheless, the current rules are there to be followed (albeit, there may be reforms to have the rules apply more broadly to assets that are “closely connected to Australia” – and not just real property).
There is also the issue of whether you are in fact a foreign resident for tax purposes – and in this increasingly global world (and in light of various tax cases) this can be problematic depending on the exact circumstances.
And, of course, a person may readily change their residency status – in which case there are both immediate and future CGT matters to take into consideration.
Another thing to note about foreign residency is that the full 50% CGT discount is generally not available to foreign residents for assets acquired after 8 May 2012. However, an apportionment may be applied if you had a period of Australian residency before you became a foreign resident.
Furthermore, foreign residents are not entitled to the CGT main residency exemption unless they satisfy the requirements of the life events test (provided they have been a foreign resident for six years or less).
Finally, where a person buys a property from a foreign resident they are required to withhold an amount for CGT and remit it to the ATO – unless some sort of variation is available (which is often the case, but not always).
As you can see “CGT and foreign residency” is a complex mix – and is a matter on which professional advice must always be obtained. So, come and speak to us at any time if you have the issue before you – or if you anticipate it arising.
