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Complex reforms broadening the regime without a transitional period make Australia a less attractive destination for business, The Tax Institute warns.
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‘Unjust’ foreign resident CGT changes could spook investors
23 August 2024
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Reforms to the foreign resident capital gains tax (CGT) regime could pile on compliance costs and even lead to double taxation, deterring much-needed overseas capital, experts say.
In a submission to Treasury, The Tax Institute said the proposed broadening of the CGT base for non-residents without a grandfathering or transitional rule was “unjust” and could catch taxpayers off guard.
It was also concerned by the removal of a minimum threshold for the regime, requiring continuous valuations during the principal asset test and new, complex notification requirements.
The proposed overhaul of the foreign resident CGT regime under division 855 of the Income Tax Assessment Act 1997 (Cth) was announced in May’s budget.
The measures are set to broaden the types of assets on which foreign residents must pay tax and would apply to CGT events on or after 1 July 2025.
This ensured the tax treatment applicable to Australian residents and foreign investors was aligned and brings the regime under OECD standards, Treasury said.
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But the Tax Institute said bringing more assets under the regime without a transitional period was “unjust” to investors who “could not have reasonably anticipated” their assets would be treated as taxable Australian property (TAP) and subject to CGT.
The lack of grandfathering or suitable transitional rules might also harm Australia’s reputation as a favourable investment environment for foreign investors, it said.
It was also concerned about the compliance costs associated with the changes. According to draft legislation, the government plans on increasing the resident capital gains withholding rate for relevant disposals of TAP from 12.5 per cent to 15 per cent and removing the current $750,000 threshold before withholding applies.
The Tax Institute said the threshold’s removal could subject small transactions to burdensome reporting requirements.
It also had concerns with the proposal to change the point-in-time principal asset test to a 365-day testing period.
While the measure was intended to prevent the manipulation of asset values shortly before disposal, it could inadvertently result in double taxation and ongoing valuations.
“This requirement could lead to compliance costs that may exceed the associated risks, complicating matters particularly for foreign residents that lack a controlling interest in the relevant company and therefore may not be able to access the required information,” The Tax Institute said.
The new test might also cause a tax liability to arise from the disposal of shares or similar interests by a foreign resident on top of the liability arising for the underlying entity when a foreign resident disposed taxable Australian real property (TARP) assets within the 365-day period.
“For example, the value of the TARP assets disposed of by the underlying entity is included in the value of TARP assets for the purposes of the PAT when the foreign resident disposes of its membership interests in that underlying entity within the 365-day period,” it said.
“We recommend that due consideration should be given to ensure that the risk of such double taxation is addressed.”
The framework for notifying the ATO about disposals of indirect Australian real property interests also required “further detail and practical consideration”.
“The approved notification form should be straightforward and not require detailed information about cost bases, potential capital gains, or individual asset values,” it said, adding the proposed $20 million threshold should be increased to reduce compliance costs for taxpayers and the ATO.
The CGT reforms come on top of recent changes to thin capitalisation and stapled structure rules to crack down on multinational tax avoidance.
The Tax Institute said it meant foreign residents were already “navigating recent unexpected and significant changes” and the government’s proposal “has the potential to further disincentivise foreign investment”.
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