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Changes to Foreign Resident Capital Gains Tax Regime

17 May 2024
Declan High Terry Kokkinos
Read Time 5 mins reading time

On 14 May 2024, the Federal Government released the 2024-25 Federal Budget (Budget).

In the Budget, the Government announced changes to the capital gains tax (CGT) regime as it applies to subsidiaries of foreign owned companies operating in Australia.

When do the changes start?

The changes will start from 1 July 2025.

What are the main changes being proposed?

The key changes which have been announced will:

  1. expand the types of assets which are subject to CGT;
  2. amend the principal asset test to a 365-day testing period for indirect interests; and
  3. require foreign owned companies to notify the ATO of the sale of shares or units exceeding $20 million in value.

At this stage, very little detail has been released about the proposed changes, but we have provided some preliminary comments for consideration below.

Expanding the types of CGT assets

Currently, foreign companies are subject to CGT on the disposal of taxable Australian property (TAP). TAP assets are direct or indirect interests in Australian land and rights attaching to such interest (for example, shares or units in landholder entities or trusts).

The Budget does not state what other assets or interests will be covered from 1 July 2025. This will be subject to consultation.

Amendments to a 365-day testing period

Non-resident entities disposing of shares or units are currently subject to the principal asset test. The principal asset test determines whether more than 50% of the market value of a company or unit trust’s assets is attributable to TAP at the time of the CGT event.

These amendments will result in the principal asset test applying at other points in time within 365 days prior to the CGT event for asset disposals from 1 July 2025.

Notification of disposals over $20m

The Budget proposes a new obligation on foreign companies to notify the ATO of an asset disposal which exceeds $20 million in value.

The notification is required to be made prior to the transaction being executed and will apply to the sale of shares or units (with a value exceeding $20 million) in a foreign owned entity that holds:

  • holds an interest in Australian land; and
  • assets other than Australian land are not TAP and therefore CGT withholding does not apply.

As a result, foreign owned sellers can expect to be subject to scrutiny from the ATO regarding these transactions and incur potential delays when entering into such transactions.

The announced changes are in addition to the existing requirement for non-residents give notice of certain actions relating to Australian land, water, entities, businesses and other assets to the Register of Foreign Ownership of Australian Assets.

Further Consultation

The Budget has not provided any further detail into these changes with the Government stating they will consult further on these changes. However, so far it is clear that the Government is placing a strong focus on compliance for non-residents.

If you are a subsidiary of a foreign owned company and need advice regarding the acquisition or disposal of interests in Australia, please reach out to our Corporate team.

stay up to date with our news & insights

Changes to Foreign Resident Capital Gains Tax Regime

17 May 2024
Declan High Terry Kokkinos

On 14 May 2024, the Federal Government released the 2024-25 Federal Budget (Budget).

In the Budget, the Government announced changes to the capital gains tax (CGT) regime as it applies to subsidiaries of foreign owned companies operating in Australia.

When do the changes start?

The changes will start from 1 July 2025.

What are the main changes being proposed?

The key changes which have been announced will:

  1. expand the types of assets which are subject to CGT;
  2. amend the principal asset test to a 365-day testing period for indirect interests; and
  3. require foreign owned companies to notify the ATO of the sale of shares or units exceeding $20 million in value.

At this stage, very little detail has been released about the proposed changes, but we have provided some preliminary comments for consideration below.

Expanding the types of CGT assets

Currently, foreign companies are subject to CGT on the disposal of taxable Australian property (TAP). TAP assets are direct or indirect interests in Australian land and rights attaching to such interest (for example, shares or units in landholder entities or trusts).

The Budget does not state what other assets or interests will be covered from 1 July 2025. This will be subject to consultation.

Amendments to a 365-day testing period

Non-resident entities disposing of shares or units are currently subject to the principal asset test. The principal asset test determines whether more than 50% of the market value of a company or unit trust’s assets is attributable to TAP at the time of the CGT event.

These amendments will result in the principal asset test applying at other points in time within 365 days prior to the CGT event for asset disposals from 1 July 2025.

Notification of disposals over $20m

The Budget proposes a new obligation on foreign companies to notify the ATO of an asset disposal which exceeds $20 million in value.

The notification is required to be made prior to the transaction being executed and will apply to the sale of shares or units (with a value exceeding $20 million) in a foreign owned entity that holds:

  • holds an interest in Australian land; and
  • assets other than Australian land are not TAP and therefore CGT withholding does not apply.

As a result, foreign owned sellers can expect to be subject to scrutiny from the ATO regarding these transactions and incur potential delays when entering into such transactions.

The announced changes are in addition to the existing requirement for non-residents give notice of certain actions relating to Australian land, water, entities, businesses and other assets to the Register of Foreign Ownership of Australian Assets.

Further Consultation

The Budget has not provided any further detail into these changes with the Government stating they will consult further on these changes. However, so far it is clear that the Government is placing a strong focus on compliance for non-residents.

If you are a subsidiary of a foreign owned company and need advice regarding the acquisition or disposal of interests in Australia, please reach out to our Corporate team.