Jenny Wong outlines proposed changes to CGT withholding tax for foreign residents.
Federal Budget 2017-2018 announced a range of proposals to amend capital gains tax affecting foreign investors as part of addressing housing affordability in Australia and improve tax compliance and integrity for foreign investors on their Australian tax obligations.
The first lot of these changes has come through in Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 introduced into Parliament on 1 June 2017 which addresses the proposal to increase the CGT withholding rate for foreign tax residents from 10.0 percent to 12.5 percent and a reduction in the withholding threshold from $2 million to $750,000. These amendments apply in relation to acquisitions of property that occur on or after 1 July 2017.
When a foreign investor sells Australian property, the purchaser will be required under the changes to pay 12.5 percent of the first element of the cost base of the CGT asset to the Commissioner. The first element of the cost base of the CGT asset is usually the purchase price of the asset. In addition, under the changes this amount may be withheld from the payment the purchaser makes to the vendor. This tax obligation will not arise if the market value of the Australian real property (including direct and indirect interests) is less than $750,000.
The Explanatory Memorandum to the Bill states that legislation to implement the other reforms in the housing affordability package to change CGT outcomes for foreign investors will be included in a later Bill. These reforms will ensure that only Australian tax residents can access the CGT main residence exemption; and for foreign residents with indirect interests in Australian real property, apply the principal asset test (section 855-30 of the ITAA 1997) on an associate inclusive basis for the purpose of determining the market value of a taxable Australian real property asset.
Under these changes to increase the withholding tax rate and reduction of the threshold, foreign investors will be less able to avoid paying capital gains tax liability on disposal of Australian property investment and it is likely there will be an increase in requests for clearance certificates with the reduction of the withholding threshold.