Following on from last years Budget which saw the removal of
certain tax benefits for foreign residents (such as the removal of
the capital gains tax (CGT) discount for foreign
residents and the increase in the rate of withholding tax on
distributions from managed investment trusts from 7.5% to 15%),
foreign residents are again targeted in proposed changes to the CGT
Principal Asset Test and Intangible Mining Rights
In 2006, changes were made to the CGT regime to narrow the types
of assets to which foreign residents could potentially be subject
to CGT. The main focus of the changes was to confirm
Australia's right to tax capital gains from the disposal of
interests in Australian real property (including mining, quarrying
and prospecting rights) as well as indirect interests in Australian
real property held through an entity.
In relation to interests held through an entity, in order for a
foreign resident to be subject to CGT it is required that the value
of assets attributable to Australian real property be more than 50%
of the value of the entity's assets. Although mining rights are
included as Australian real property for these purposes, there have
been some cases that have determined that "mining
information" is not real property. Where "mining
information" has sufficient value, it may be that the 50%
threshold is not breached and, as a result, CGT does not apply to
the disposal of interests in that entity by a foreign resident.
To address this issue it is proposed that, in determining the
real property assets of an entity, intangible assets connected to
the right to mine, quarry or prospect for natural resources (such
as mining information) will be treated as part of the rights to
which they relate. This change can be expected to result in the
value of real property in many mining companies now exceeding 50%
of the entity's assets thereby subjecting the disposal of
interests in that company by foreign residents to CGT (typically at
the Australian corporate rate of tax of 30%).
Principal Asset Test and intercompany dealings in consolidated
The Government has also identified that foreign investors that
control Australian consolidated groups with significant Australian
real property holdings can, by intercompany dealings between
entities in the group (such as loans), create non-real property
assets and thereby dilute the value of real property assets in the
group. The result achieved is that the 50% threshold is not
breached and a disposal of interests in the group by a foreign
resident is not be subject to CGT. It is proposed that
inter-company dealings between entities in the same consolidated
group will not form part of the asset calculations so as to
potentially dilute the value of real property holdings of the
The two proposed changes referred to above will apply to CGT
events occurring after the Budget announcement on 14 May 2013.
New withholding tax regime
The final change to the CGT regime announced in the Budget so
far as it relates to foreign residents, concerns the proposed
introduction of a new withholding tax regime. At the present time
if a foreign resident disposes of an asset subject to CGT, the
collection of any tax from that foreign resident relies on the
foreign resident filing a tax return and paying tax. This can
present obvious collection issues.
A withholding tax regime will be introduced which will require
the purchaser of an asset from a foreign resident, and which is
subject to CGT, to withhold 10% of the proceeds of sale and remit
that amount to the Australian Taxation Office. The proposed
withholding will not apply to residential property transactions
valued at under A$2.5 million. The new withholding regime will also
apply where the disposal of an asset by a foreign resident gives
rise to a taxable revenue gain rather than a capital gain.
The new withholding tax regime is proposed to apply from 1 July
2016. The Government indicates that it intends to consult on the
new regime and a discussion paper outlining the proposed design of
the regime will be released by the end of 2013.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).