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Background
The Australian government has proposed significant amendments to the Capital Gains Tax (CGT) regime affecting foreign residents. These changes are part of the 2024-25 Federal Budget and aim to ensure foreign residents are appropriately taxed on gains from Australian property.
Key Proposed Changes
Removal of Main Residence Exemption
Foreign residents will no longer be eligible for the main residence exemption for CGT purposes. This means that any capital gains from the sale of a primary residence in Australia will be fully taxable if the seller is a foreign resident.
Clarification and Broadening of Taxable Assets
The types of assets subject to CGT for foreign residents will be expanded. This includes:
Leases or licenses to use land in Australia.
Australian water entitlements related to land.
Infrastructure and machinery installed on land, such as wind turbines and transmission towers.
Non-portfolio membership interests in entities where more than 50% of the underlying value is derived from Australian real property.
The aim is to capture assets deriving economic value from Australian land and natural resources.
Principal Asset Test (PAT) Amendment
The PAT, which determines if an entity’s value is primarily derived from Australian real property, will change from a point-in-time test to a 365-day testing period. This change is intended to provide a more comprehensive assessment of an entity's value over time.
Increased Compliance and Reporting Requirements
Foreign residents will need to notify the Australian Taxation Office (ATO) of transactions involving shares or other interests valued at $20 million or more before executing the transaction. This aims to ensure that the ATO is aware of significant transactions in real-time.
Increased Withholding Tax Rate
The foreign resident capital gains withholding (FRCGW) tax rate will increase from 12.5% to 15%.
The withholding threshold will be reduced from $750,000 to $0, meaning all transactions involving taxable Australian real property or indirect Australian real property interests will be subject to withholding tax.
Impact on Foreign Investment
These changes are expected to impact foreign investment in Australian property, particularly in sectors such as infrastructure, energy, and resources. The increased tax burden may deter some foreign investors, potentially affecting the overall attractiveness of the Australian property market.
Transitional Provisions
The changes will apply to CGT events occurring on or after 1 July 2025. There are transitional provisions for properties held before the announcement date, but specifics on these provisions are detailed in the consultation paper.
Consultation Process
The government has released a consultation paper and is seeking feedback from stakeholders. Comments can be submitted until 20 August 2024. This consultation process is crucial for refining the proposed measures and ensuring they are practical for taxpayers.
The proposed changes reflect the Australian government's intent to tighten the tax regime for foreign residents and align it with international best practices. Stakeholders, including foreign investors and property owners, should review these changes and consider their potential impact. These measures are part of broader efforts to ensure the integrity of Australia's tax system and address concerns about foreign investment in the property market.