As foreshadowed in the 2012-13 Budget, the 50% Capital Gains Tax (CGT) discount will no longer be available to non-resident investors from 7:30pm on 8 May 2012. The announcement came as a surprise to many and have been strongly criticised, particularly by the property industry. With the mining sector coming off the mining boom and the manufacturing sector struggling, one sector seen as capable of generating future growth and creating employment is the property sector. However, this announcement is seen as another blow to the property sector, already facing strong headwinds from changes to the first home owners grant, rising construction costs and falling property prices. Residential property developers have sadly experienced withdrawal of expression of interests from overseas parties since the announcement was made in the 2012-13 Budget.
The Government has now released the exposure draft legislation and draft explanatory materials for the removal of the CGT discount for non-resident individuals including distributions to such individuals from trusts.
Prior to 8 May 2012, non-resident individuals, partnerships and trusts have been able to discount any capital gains on taxable Australian property by 50%. This means that non-residents effectively pay income tax on half of the capital gain derived.
The draft legislation has the following effect:
- Broadly speaking, the CGT discount will no longer be available to foreign residents on capital gains:
- derived from disposal of an asset acquired after 8 May 2012; and
- accrued after 8 May 2012 from disposal of an asset even if the asset was acquired before that date (and depending on the method applied).
- A saving grace is that the CGT discount will still apply to the portion of the capital gain accrued up to 8 May 2012. The following methods will apply to calculate the discount on the capital gain:
- The default approach – in effect, the discount percentage is reduced on a straight line basis with reference to the number of days before and after 8 May 2012. With the relatively poor property price performance in recent years, it is envisaged that affected taxpayers will have a better outcome under the market value approach below.
- Market value approach – Non residents may choose to apply this method. Under this approach, an independent valuation of the property as at 8 May 2012 will be required. The discount up to 50% will be available for the capital gain depending whether the gain accrued up to 8 May 2012 is higher or lower than the overall capital gain. That is, if the gain accrued up to 8 May 2012 is more than the overall capital gain; full discount can be applied to the overall capital gain. If otherwise, the discount is reduced accordingly.
- Temporary residents will be treated as foreign residents and therefore are ineligible for the CGT discount after 8 May 2012.
- The CGT discount will be apportioned where an individual has been an Australian resident and, a foreign or temporary resident for part of the period when the asset was held. The apportionment of the CGT discount will ensure that the full 50% discount is applied to periods where the individual was an Australian resident.
- The rules will similarly apply where a trust disposes of an asset and the capital gain is distributed to a non resident individual, if:
- the disposal occurs after 8 May 2012; and
- the individual is a foreign resident or temporary resident during some or all of the period when the asset was held by the trust.
Also from a practical perspective, this measure will require registry services to include additional disclosure on investor statements. This may increase the compliance costs of managed property trusts with non-resident unit holders.
Further it is important for non-residents to take into account the removal of the CGT discount in their acquisition tax structuring considerations. Moore Stephens will be happy to assist in this regard.
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