On 8 March 2013 the Assistant Treasurer released for public consultation exposure draft legislation and draft explanatory material for the removal of the 50 percent capital gains tax (CGT) discount for non-resident individuals who dispose of assets after 8 May 2012. The measures were initially announced by the Deputy Prime Minister and Treasurer on 8 May 2012 as part of the tax measures in the Federal Budget. The measures will apply to any capital gains accrued after 7.30pm AEST on 8 May 2012 but will not generally apply to any gains accrued prior to this time.
The current law
The law currently provides that an individual who has held a CGT asset for at least 12 months may reduce any capital gain made in relation to that asset by a discount percentage of 50 percent before including the gain in their assessable income. The discount is available regardless of tax residency status of the individual.
Summary of the proposed amendments
The aim of the proposed amendments is to restrict the application of the 50 percent discount to Australian residents only from 8 May 2012. The amendments will apply to an individual where:
- the individual has a discount capital gain, including a discount capital gain as a result of being a beneficiary of a trust, from a CGT event that occurred after 8 May 2012; and
- the individual was a foreign resident or a temporary resident at any time on or after 8 May 2012.
The discount percentage for any discount capital gains arising from a CGT event occurring on or before 8 May 2012 will remain unaffected by the amendments.
The explanatory material confirms that the effect of the proposed amendments will be to:
- retain the full 50 percent CGT discount for capital gains made by foreign resident individuals to the extent that the increase in the value of the CGT asset occurred prior to 9 May 2012;
- remove the 50 percent CGT discount for capital gains made by foreign or temporary residents after 8 May 2012; and
- apportion the 50 percent CGT discount for capital gains where the individual has been both an Australian resident and a foreign or temporary resident after 8 May 2012 to ensure that the full 50 percent discount will only be able to be claimed for periods in which the asset was held while the individual was an Australian resident.
The proposed amendments will also apply where an Australian resident becomes a foreign resident and that resident has assets that are taxable Australian property. This includes where the individual has chosen to disregard the CGT event I1 triggered by their change in residency status.
It should be noted that the proposed amendments will only impact the discount percentage that is applied to a discount capital gain and will not in any way affect the other CGT rules.
Calculating the CGT discount percentage
The explanatory material provides some guidance on how the CGT discount percentage is to be calculated. It provides that where an asset is acquired after 8 May 2012 and is held by an individual who is a foreign or temporary resident during some or all of the time that the asset is held, the CGT discount percentage is to be apportioned to allow the individual to receive the discount for the days that they were an Australian resident and to deny the discount for days that they were a foreign or temporary resident.
Where an asset is acquired prior to 9 May 2012, the discount percentage will be available for all gains accrued prior to 8 May 2012 provided that the individual elects to use the market value of the asset as at 8 May 2012. For any gains accrued after 8 May 2012, the CGT discount will be apportioned to reflect the period that the asset was held while the individual was an Australian resident.
Who will be affected by the proposed amendments?
Foreign and temporary residents
It is clear that the amendments will impact any foreign or temporary residents who own CGT assets in Australia. The position is clear that where an individual is a foreign resident or temporary resident for the entire time that an interest in a CGT asset in Australia is held, the discount percentage available for any discount capital gain will be zero. These individuals should consider the proposed amendments and the impact that they will have on the CGT liability that may arise when the asset is sold.
We note that there is an issue surrounding whether New Zealand citizens are 'temporary residents' for tax purposes. If you are a New Zealand citizen and you hold assets in Australia, we recommend that you seek advice on how the proposed amendments will affect you.
Australian residents relocating overseas
It is also necessary to consider the impact that the proposed amendments will have on Australian residents who own CGT assets in Australia and who subsequently relocate overseas.
Where an individual relocates overseas and ceases to be an Australian resident, CGT event I1 happens to all CGT assets held by that individual just prior to that time, that are not taxable Australian property (for example, foreign assets such as shares, property or other investments). This is called the 'deemed disposal rule'.
The effect of the deemed disposal rule is that where an individual becomes a non-resident, a capital gain or loss will arise on their non-taxable Australian property. The individual may choose to disregard the CGT event I1 and treat all of their non-taxable Australian property as taxable Australian property. This will mean that when they eventually sell the assets, they will be liable for any capital gain arising from that sale.
The proposed amendments will impact individuals who relocate overseas and become a foreign resident and choose to disregard CGT event I1. These individuals will not be eligible for the 50 percent CGT discount on their assets for the period during which they are not Australian residents.
Australian residents returning from overseas
The proposed amendments will also affect Australians who have been resident overseas for some time and who retain CGT assets in Australia. These individuals will not be eligible for the 50 percent CGT discount on any gain made from the eventual sale of the asset for the period in which they were not an Australian resident after 8 May 2012.
If you currently hold CGT assets in Australia and are considering moving overseas, or if you are a foreign or temporary resident and you hold CGT assets in Australia, then the proposed amendments may apply to you. It is recommended that you seek advice in relation to the proposed amendments and the impact it may have on you.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.