Global Pensions Group - Knowledge Bank - Australian Capital Gains Tax and foreign residents

Knowledge Bank

Australian Capital Gains Tax and foreign residents

For Australian capital gains tax (‘CGT’) purposes, foreign residents are subject to the same CGT consequences as Australian residents in respect of assets having the ‘necessary connection with Australia’. However, where assets do not have the ‘necessary connection with Australia’, capital gains by foreign residents are generally disregarded.

The Australian Federal Budget 2005/2006 proposed changes to be made to the ‘necessary connection with Australia’ rules and after a long wait, these changes were introduced in the Tax Laws Amendment (2006 Measures No. 4) Bill 2006 (‘TLAB’) released on 22 June 2006. The TLAB proposes to reduce the range of assets in respect of which foreign residents will be subject to Australian CGT. These proposed changes will impact all foreign residents whether they are individuals, companies, trusts or trustees of foreign trusts holding interests in Australian assets or resident entities.

TLAB has proposed that a capital gain or loss that a foreign resident makes will generally be disregarded unless the capital gain or loss relates to “taxable Australian property”. “Taxable Australian Property” includes direct or indirect interests in Australian real property or mining interests and the business assets of an Australian permanent establishment.

If enacted, the measures set out in TLAB will apply to CGT events that happen on or after the date TLAB receives royal asset.

In our view, the following are the key implications that should be considered as a result of the proposed amendments:

Broadly, most foreign investors in non-property sectors in Australia (like financial services, retail, manufacturing and industrial, and technology) should be able to dispose of their Australian interests without any Australian CGT;

Foreign investors in property related sectors in Australia (like property and construction, energy and natural resources) potentially remain within the CGT net and the reach of the Australian CGT net may be expanded so as to potentially apply to the disposal of shares in offshore companies; and

These CGT amendments may mean the prospective foreign investors should reconsider the holding structures through which they invest into Australia.

If you would like more information on TLAB and the impact of these proposed changes to the CGT rules, please contact denisehoney@bvhglobal.com or craigvanwegen@bvhglobal.com.

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter. You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances. The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.