Following the Government’s recent Budget announcement, the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (Cth) has modified the foreign resident CGT withholding regime from 1 July 2017 to:

  • reduce the withholding threshold for disposals by foreign residents of certain taxable Australian real property from $2 million to $750,000; and
  • increase the withholding rate from 10% to 12.5%.

Treasury has also released the Exposure Draft Treasury Laws Amendment (Housing Tax Integrity) Bill 2017: Capital gains tax changes for foreign residents and the accompanying Exposure Draft Explanatory Material for public comment.  If passed, the legislation will, from 9 May 2017:

  • remove the entitlement to the CGT main residence exemption for foreign residents that have dwellings that qualify as their main residence; and
  • modify the foreign resident CGT regime to clarify that the ‘principal asset test’ will apply on an associate inclusive basis.  Under the foreign resident CGT regime, a capital gain or capital loss made by a foreign resident in respect of an interest in another entity is disregarded unless both the ‘non-portfolio test’ and the ‘principal asset test’ are satisfied in relation to the interest.  The purpose of the non-portfolio interest test is to establish whether a foreign resident has sufficient interest in another entity and the purpose of the principal asset test is to determine when an entity’s underlying value is principally derived from taxable Australian real property (TARP).  A participation interest held by a foreign resident in another entity will pass the principal asset test if the sum of the market values of the other entity’s TARP assets exceeds the market values of that entity’s non-TARP assets, and the foreign resident entity’s total participation interests in the other entity is less than 10%. The proposed changes clarify that the participation interests of both the foreign resident entity and its associates will be taken into account in determining if the 10% threshold has been reached.

Submissions on the exposure draft legislation are due by 15 August 2017.