Australia: Proposed removal of 50% CGT discount for non-residents

Last Updated: 18 April 2013
Article by Michael van Schaik

In the May 2012 Budget, the Federal Government announced it proposed to remove the 50 per cent capital gains tax (CGT) discount for non-residents on capital gains accrued after 7.30 pm (AEST) on 8 May 2012. The CGT discount will remain available for capital gains accrued prior to this time where non-residents choose to obtain a market valuation of assets as at 8 May 2012.

The Minister made the following comments in his subsequent press release:

'In addition, the Government will remove eligibility for the 50 per cent discount on capital gains earned after Budget night by non-residents on TAP, such as real estate and mining assets. Non-residents will still be entitled to a discount on capital gains accrued prior to Budget night (after offsetting any capital losses), provided they choose to value the asset as at that time.

The discount is not necessary to attract investment from non-residents into these assets, which are immobile. Savings from this measure are estimated to be $55.0 million over the forward estimates period.'

Until Friday, 8 March 2013 no further communication had issued from either Treasury or the Assistant Treasurer charged with the implementation of the proposed changes. An exposure draft and accompanying memorandum then issued.

Submissions were sought by 5 April 2013. Our submission is attached - see below this article.

The Exposure Draft proposes that where a CGT event does occur after 8 May 2012, the discount percentage applying to a discount capital gain from that event will depend on:

  • whether the asset was held on, or was acquired after, 8 May 2012;
  • if the asset was held on 8 May 2012, whether or not the individual was a resident on that date;
  • whether a choice is made by an individual who was a foreign or temporary resident on 8 May 2012 to use the market value approach to determine the part of the discount capital gain that accrued on and prior to that date; and
  • the residency of the individual during so much of the period the asset was held after 8 May 2012.

Summary of our comments

We were disappointed with the lack of information forthcoming from Treasury and the Assistant Treasury with the Exposure Draft issuing some 10 months after Budget night.

The only information available within the public domain from 8 May 2012 until 8 March 2013 indicated that the proposed changes would only apply to non residents and on Taxable Australian Property (TAP).

We now have a piece of draft legislation that is entitled 'removing the CGT discount for non residents' that will apply to:

  • Resident taxpayers
  • Temporary residents; and
  • Foreign residents

Australians living overseas will also be materially impacted by the proposed changes. The proposed legislation will apply to certain assets held by Australian residents at the time they cease Australian tax residency. An example of this type of asset would be shares in listed Australian companies i.e. Commonwealth Bank, Telstra, BHP Billiton. Clearly this was not evident in the May 2012 Budget night announcement.

When an individual ceases Australian tax residency, CGT event I1 occurs, the individual is treated as having disposed of its non TAP assets it owned just before the residence change time for their market value and is required to determine whether a capital gain or loss has been realised in respect of that notional disposal. These are commonly referred to as the deemed disposal rules. Any subsequent disposal by the individual post departure from Australia is not subject to CGT.

As an alternative, the individual can make an election under section 104-165 that the deemed disposal rules will not apply and therefore these assets are treated as effectively TAP and are subject to CGT as and when the asset is actually sold.

Under the Exposure Draft, where an Australian national made the election at the time of their departure from Australia (maybe several years ago!), they will now lose the 50% CGT discount on any growth post 8 May 2012.

It is interesting to note that the ASX All Ordinaries was 4,133.70 on 8 May and is currently trading at 4,980.20 as at 9 April 2013, an increase of 20.47% that will no longer receive the 50% CGT discount.

Individuals would have made CGT decisions at the time of departure, but the goal posts have moved after the kick was taken.

The Exposure Draft does not consider the interaction with Australia's Double Tax Agreements. Australia's newer Double Tax Agreements (DTA) generally makes specific provision for taxing capital gains and our DTA follow the Model OECD convention. The OECD commentary on Article 22(5) makes it clear that movable property is only taxable in the country in which the individual resides.

Indeed, where the departing individual has made the deferral election under section 104-165 and subsequently makes a gain on the disposal of a the asset while a resident of either the United States or the United Kingdom, the respective Agreements provides that the gain is only taxable in the US or the UK respectively.

The proposed changes will only make personal income tax return compliance more complex and are clearly against previously stated Government policy.

This publication is issued by Moore Stephens Australia Pty Limited ACN 062 181 846 (Moore Stephens Australia) exclusively for the general information of clients and staff of Moore Stephens Australia and the clients and staff of all affiliated independent accounting firms (and their related service entities) licensed to operate under the name Moore Stephens within Australia (Australian Member). The material contained in this publication is in the nature of general comment and information only and is not advice. The material should not be relied upon. Moore Stephens Australia, any Australian Member, any related entity of those persons, or any of their officers employees or representatives, will not be liable for any loss or damage arising out of or in connection with the material contained in this publication. Copyright © 2011 Moore Stephens Australia Pty Limited. All rights reserved.

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