Recent changes to the Australia?s capital gains tax regime have made Australia a more attractive jurisdiction in which to invest for many non resident investors. The purpose of this article is to outline the capital gains tax (CGT) and foreign resident measures contained in Australia?s tax law to provide an overview of the new rules. Further to this, investors transferring land or interests in ?land rich? entities should consider domestic stamp duty implications. The intention of the new rules are as follows:-
1. To increase Australia?s status as an attractive place for business and investment; 2. To encourage foreign residents to use Australia as a regional base of operation; 3. To align Australia?s domestic tax law with its current tax treaty practice; 4. To improve the interaction between the existing CGT regime and tax treaties 5. To address the outcomes of the decision in FC of T v Lamesa Holdings BV 97 ATC 4752. Lamesa dealt with the transfer of foreign membership interests .
The Old Rules
Previously, Australian CGT applied to non-residents on the disposal of assets that were listed as having the “necessary connection with Australia” . These included:
land, buildings, shares giving company title occupancy and various interests in connection with land situated in Australia;
any asset which has been used by the taxpayer in carrying on business through a permanent establishment in Australia;
shares in an Australian private company;
an interest in an Australian resident trust;
shares in an Australian resident public company (or units in a resident unit trust) where the individual and/or the individual’s associates have been beneficial owners of at least 10% of the issued share capital of the company (or of the issued units in the unit trust); and
options or rights to acquire any of the assets mentioned above.
Furthermore CGT also applied to capture interests in a resident trust (varying from discretionary trusts to fixed or unit trusts) purely on the basis of the residence of the trust. That is, any disposal of interests in or distributions of capital gains from a resident trust to a non resident would be subject to Australian CGT where either the trustee of the trust is a resident of Australia or where the central management and control of the trust is in Australia at any time of the year . This was regardless of whether the underlying assets of the trust estate had the necessary connection with Australia. Interestingly, Australian CGT could be avoided by a non resident who wanted to invest in assets which had the necessary connection with Australia, by indirectly owning such assets through an interposed entity which was a non-resident for tax purposes.
Interest in Fixed Trusts
The former CGT rules made it unattractive to hold of assets in an Australian resident trust as compared to holding assets (especially, Australian managed funds) directly. The previous CGT rules taxed the gain arising from the disposal of interests in resident trusts and resident unit trusts (where more than 10% of units were held by an individual) even where the assets of the trust did not have the necessary connection with Australia. This issue was partially alleviated by former law which operated to disregard a capital gain or loss arising from the above situation where the following conditions were met:
the individual was a non resident at the time of the CGT event
the interest in the fixed trust had the necessary connection with Australia, and
90% or more (by market value) of the assets of the trust did not have the necessary connection with Australia at the time the CGT event happened to the taxpayer’s interest in the trust
The effect of this provision was to shift the focus onto whether the underlying assets of a fixed trust had the necessary connection with Australia before subjecting a non resident to Australian CGT. Consequently, this afforded the same tax treatment for direct and indirect ownership of CGT assets which did not have the necessary connection with Australia. However, a capital gain or loss for a non portfolio interest in an Australian property trust did not usually qualify for an exemption as property trusts typically hold Australian real property which naturally, had the necessary connection with Australia.