MOVING OVERSEAS? BEWARE OF THE NEW CAPITAL GAINS TAX (CGT) DISCOUNT
Exposure draft legislation recently released formalises the announcement made on 8 May 2012 (Budget Night) about foreign individuals not being entitled to the CGT discount. However, the rules also affect Australians who move overseas and become non-residents under the Australian tax rules.
Non-residents who own "taxable Australian property" are subject to the Australian CGT rules. Taxable Australian property consists of taxable Australian real property (ie interests in land or Australian mining, quarrying or prospecting rights), or indirect interests in taxable Australian real property. Indirect interests include non-portfolio (ie 10% or more) interests in entities where, broadly, more than 50% of the market value of the entity's assets consist of taxable Australian real property.
Therefore, the capital gains affected by these rules are ones generated from the disposal of Australian land, interests in land, mining interests or interests in "land rich" entities (eg shares in companies or units in trusts).
Prior to 8 May 2012, non-residents who were subject to the Australian CGT rules were also entitled to apply for the CGT discount, where the requirements for the concession were satisfied. Broadly, if a non-resident individual held an investment property in Australia for more than 12 months and sold it for a capital gain, they would have been eligible for the 50% CGT discount. Temporary residents (Australian tax residents who are in Australia on a temporary visa) are subject to the same CGT rules as non-residents.
On 8 May 2012, the Federal Government announced that the 50% CGT discount would cease to apply to non-residents. Despite the title of the exposure draft mentioning "foreign individuals", these rules can also apply to Australians who are non-residents, for Australian tax purposes.
The rules do not apply to assets disposed of on or before 8 May 2012 or to individuals who were, at all times, Australian residents.
The application of the proposed rules are summarised below.
ASSETS ACQUIRED BEFORE 9 MAY 2012
Market value election – 50% discount applicable to gains up to 9 May 2012
For assets acquired before 9 May 2012, an apportionment rule applies and an election can be made to apply a market value "method" to the gains accrued up to 8 May 2012. This election can only be applied where the individual was a non-resident or temporary resident on 8 May 2012. The election allows the CGT discount to apply to the gain accrued from the date of acquisition up to 9 May 2012, but not to any gain accruing during a period of ownership after 8 May 2012 when the individual was a non-resident or temporary resident.
Where the election is made, the individual is required to calculate the "excess" of the capital gain which accrued before 9 May 2012. The excess is the extent to which the market value of the asset as at 8 May 2012 exceeded its cost base (ie the capital gain up until that point in time). If all of the capital gain is attributable to the period before 9 May 2013 (ie the excess is more than or equal to the capital gain when the assets is sold), the discount percentage is 50%.
If the excess is less than the capital gain (ie some of the gain arises after 8 May 2012), this creates a "shortfall" amount. In this case an apportionment of the CGT discount is worked out, based on the number of days after 8 May 2012 when the individual was a non-resident or temporary resident.
Where this election is made, effectively, the full 50% discount will apply to the "excess", being the gain accrued up to 9 May 2012. When an individual was both a resident and a non-resident or temporary resident after 8 May 2012, the discount in relation to the shortfall (the gain generated after 9 May 2012) is apportioned between the two periods.
To make an election, the individual must ascertain the market value of the asset as of 8 May 2012 and must keep records of this for verification purposes.
Market value election not made
If the market value election is not made, the discount percentage applicable to the sale of the asset is calculated as follows:
Number of apportionable days that you were an
Australian resident (not temporary)
2 x number of days in discount testing period
The discount testing period is the total time that the individual owned the asset. The "apportionable days" are the days after 8 May 2012 during the discount testing period.
If the individual was a non-resident for all of the apportionable days, they would have a discount percentage of 0%.
ASSETS ACQUIRED AFTER 8 MAY 2012
Generally, for assets acquired after 8 May 2012, the individual applies for an apportionment of the days they were an Australian resident and the days they were a non, or temporary resident. This apportionment determines the amount of the discount percentage applicable to the capital gain.
|Asset ownership period||Residency status||CGT discount applicable|
|Acquired and sold after 8 May 2012||Non-resident or temporary resident for all of ownership period||Nil|
|Acquired and sold after 8 May 2012||Partly a resident and partly a non-resident or temporary resident||50% discount reduced on a days basis:
Number of days during the "discount test period" that the individual was an Australian resident (not temporary) 2 x number of days in the discount test period
Again, the discount test period for an individual is the period that the individual owned the asset.
This method does not seek to distinguish between the changes in market values for the periods when the individual was a non-resident and is based purely on days as a resident or otherwise.
FOREIGN RESIDENTS INVESTING VIA AUSTRALIAN TRUSTS
Where the CGT asset is held by a trust, the discount test period is amended to be the period between either the day that the trust owned the asset (if the individual was a beneficiary at that time) and the time it is sold, or the date the individual became a beneficiary of the trust (if the asset was held at that time) and the date the asset is sold.
Broadly, these proposed rules should only impact foreign resident or temporary resident individuals that are beneficiaries of trusts where:
- An Australian trust realises a capital gain in respect of taxable Australian property, which it distributes to the foreign or temporary resident (Scenario 1); or
- The foreign or temporary resident realises a capital gain in respect of an interest (eg units) in an Australian trust and that interest is taxable Australian property (Scenario 2).
In Scenario 1, the impact of the proposed rules depends on whether the Australian trust is a managed investment trust (MIT). If the Australian trust is a MIT, the proposed rules do not impact on the previous position as the benefit of the capital gains discount is not available under the current MIT rules. However, if the Australian trust is not a MIT, then the proposed rules remove the benefit of the capital gains discount for foreign resident individuals and trusts where this was previously available.
In Scenario 2, the proposed rules remove the benefit of the capital gains discount for foreign resident individuals and trusts which was previously available.
The apportionment calculations outlined above also apply to capital gains made via Australian trusts.
As with any change, these proposed rules will cause issues with compliance, including in relation to confirming the date that certain assets were acquired, and in relation to the market valuation of assets. You should consider whether any of the above scenarios apply to you and whether it is beneficial to obtain valuations now. In relation to the market value election, if a taxpayer believes that their investment has increased in value up to 8 May 2012, it would be prudent to obtain valuations (as at that date) now, rather than undertaking a valuation when the asset is sold.
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