Foreign resident CGT rules up for consultation

Treasury is tightening the rules around capital gains tax (CGT) to ensure foreign residents pay their fair share of tax in Australia.

The draft law broadens and clarifies the definition of Taxable Australian Real Property (TARP) and introduces a definition of real property into the Income Tax Assessment Act 1997 that forms part of the definition of TARP.

The government currently broadly puts taxable Australian property into five categories of CGT assets.

Two of these categories are the subject of these amendments: Taxable Australian real property (TARP) and indirect Australian real property interests (IARPIs). IARPIs are defined as membership interests in entities, the underlying value of which is principally derived from TARP.

Under the new laws, CGT assets under TARP will be clarified and broadened to include assets that have a close economic connection to Australian land and/or natural resources.

TARP currently includes mining, quarrying and prospecting rights. It may soon include water entitlements in relation to a water resource situated in Australia, and an option or right to acquire a CGT asset over TARP assets.

"Real property is defined inclusively (that is, building from the ordinary meaning) and captures rights and interests over land (regardless of how a state law or territory law treats the interest), things fixed or installed on land, whether or not they are treated another way under state and territory law or general law, and leases and licences over such assets," the Strengthening the Foreign Resident CGT Regime explanatory documents state.

IARPI is set to be defined to be as a non-portfolio membership interest held by an entity in another entity that passes the principal asset test (PAT) at the point-in-time of testing or at any time during the preceding 365 days. The PAT requires mining information to be included in the calculation of TARP assets for the purposes of ascertaining whether the interest is an IARPI.

Finally, where a foreign resident disposes non-IARPI membership interests valued at $50 million or more, they may notify the Australian Taxation Office in the approved form and provide a vendor declaration to the purchaser confirming that they are exempt from withholding obligations.

"This makes clear that foreign resident CGT applies to assets that derive their economic value from the use of Australia's land and natural resources," Treasury said.

"Capturing assets with a close economic connection to Australia is consistent with principles outlined in the OECD Model Tax Convention, which guides international tax practice."

The consultation will take submissions until April 24.