Foreign residents & CGT
Through the extension of a number of pre-existing measures, the Government is tightening foreign residents’ ability to access Capital Gains Tax (CGT) concessions.
As a result of measures in the 2013 Budget, a 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property was introduced. This regime applied to all contracts entered into on or after 1 July 2016.
Specifically excluded from the ‘taxable Australian property’ umbrella were residential real property transactions with a market value under $2 million. This ensured that the vast majority of residential house sales were unaffected by this measure.
What has changed?
Under the proposed Budget measures, the applicable CGT withholding rate for foreign tax residents will increase to 12.5% from 1 July 2017.
Main residence exemption
In another hit to foreign residents, the Government will deny foreign and temporary tax residents access to the CGT main residence exemption from 7.30pm (AEST) on 9 May 2017. Existing properties held prior to this date will be grandfathered under the existing provisions until 30 June 2019.
It is expected that these rules will result in the deemed disposal and reacquisition of foreign owned properties on 1 July 2019 at market value. Where foreign ownership of property is maintained after this date, we suspect market valuations will be required to exempt (to some extent) any gain accrued to this date.
To extend their reach on foreign owned property even further, the Government has proposed to apply the principal asset test for investors in Australian companies on an associate inclusive basis from 7.30pm (AEST) on 9 May 2017. For foreign tax residents with indirect interests in Australian real property, this measure will circumvent the ability to avoid a CGT liability by disaggregating indirect interests in Australian real property.
Practically, this means that the ATO will now be provided with the ability to look through interposed entities ultimately owned by foreign residents, and levy CGT on the disposal of property by an entity whose underlying value is principally derived from Australian real property.
In an attempt to make home ownership for Australians more affordable, the Government’s proposed measures have rendered home ownership by foreign and/or temporary residents abundantly more difficult and unattractive. We wait with baited breath to see whether the ATO will be able to keep up with the increased demand from sellers seeking residency certificates.