CGT exemptions and concessions. More valuable now for the foreign resident.
As a result of amendments to Division 115 of the Income Tax Assessment Act 1997 the capital gains tax discount (usually a 50% reduction) is not available to foreign and temporary residents for gains accruing after 8 May 2012. The general position with respect to capital gains tax (CGT) liabilities for foreign residents is that they are only assessed in Australia on gains from taxable Australian property (TAP). The scope of what is considered to be TAP, and therefore taxable in Australia, was significantly reduced in 2006 with the stated aim of attempting to attract and encourage investment in Australia. This led some to express concerns that residents were unfavourably treated as compared to foreign residents in respect of CGT. Perhaps the removal of the CGT discount for foreign residents is an attempt to allay those concerns and redress the balance. Furthermore, the Explanatory Memorandum to the Bill amending the Income Tax Assessment Act to remove the CGT discount revealed the view that the CGT discount is not necessary to attract foreign investment in TAP as these assets produce attractive, location specific, returns.
This article considers some concessions and strategies that may become more significant in the context of these changes.
Summary of the new law
The new law seems deceptively simple. That is not the case. Nonetheless, the new law can be summarised as follows. For CGT events occurring after 8 May 2012, the CGT discount percentage will depend on:
- When the asset was acquired;
- The residency status of the individual on 8 May 2012;
- Whether the individual chooses a “direct apportionment approach” or a “market value approach”; and
- The number of days that the individual was a resident as compared to the number of days they were not a resident during so much of the period that the asset was held after 8 May 2012.
This article is not a discussion of the new provisions themselves or all the circumstances in which they may be relevant. However one outcome is that for individuals who leave (or left) after 8 May 2012 and become (or became) foreign residents, the effect of the provisions is to apportion the CGT discount in such a way as to ensure the full 50% discount applies to gains accrued during the period when the individual was a resident. Gains accruing after 8 May 2012, and where the individual was not a resident, will not have any discount applied. The ATO has provided a calculator on its website to assist effected taxpayers with their calculations.