CGT changes – excluding non-residents from the ‘main residence’ exemption; imposing CGT on non-residents for CGT events happening to their ‘membership interests’ by calculating ‘taxable Australian real property (TARP) under the ‘principal asset test’ in s855-30 on an ‘associate inclusive’ basis

On Fri 21.7.2017, Treasury released draft legislation to implement two 2017-18 Budget measures to make CGT changes for foreign residents and sought comments from the public.

Before progressing to the substance of these changes, the draft Explanatory Memorandum (EM) notes that these are 2 of the measures announced on budget night (9 May 2017), which were designed to increase housing affordability. It notes that a third reform to the CGT treatment of foreign residents was:

• CHANGES TO THE CGT WITHHOLDING REGIME for persons acquiring property from non-residents. The effect of these changes was to increase the amount to be withheld from 10% to 12.5% of the purchase price and to reduce the threshold for withholding from $2 million properties to only $750,000 properties. This was contained in Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 and took effect on 1 July 2017.

In summary it will achieve the following.

1. MAIN RESIDENCE EXEMPTION not available to non-residents: From 9 May 2017, the Government proposes to remove the entitlement to the CGT main residence exemption for foreign residents that have dwellings that qualify as their main residence. Therefore, any such capital gain or loss arising upon disposal of a foreign resident’s main residence would need to be recognised.
2. PRINCIPAL ASSET TEST on an ‘associate inclusive’ basis: From 9 May 2017, the Government proposes to modify the foreign resident CGT regime to clarify that, for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property, the principal asset test will apply on an associate inclusive basis. These changes will be effected by amending the ‘sub-10%’ definitions of ‘TARP’ and ‘non-TARP’ assets in s855-30(4), item 1 of the ITAA97. This is supplemented by an ‘anti-double counting’ rule being added in s855-4A).

The changes to the ‘main residence’ provisions (to exclude non-residents) involve quite a lot of changes to the law.

1. There are changes to the ‘Basic Case’ provisions in s118-110(2)(a) to exclude CGT events I1 and I2 from the CGT events to which the exemption applies (these are the ones relating to a person ceasing to be a resident).
2. There is also a new ss(3) added to express the exclusion of the exemption for ‘foreign residents’.
3. The provisions ‘pro-rating’ the exemption based on the time that the dwelling is the ‘main residence’ and not the ‘main residence’ in s118-185 are expressed not to apply (in a new ss(3)) if the person is a non-resident at the time of the CGT event. The effect of this is to deny the non-resident any exemption – even for the periods of time that they were resident and the dwelling was their ‘main residence’. [Item 10 in the draft Bill]
4. The deceased estate provisions are amended to preclude a beneficiary of an estate who is a non-resident getting any CGT exemption for the period in which they are the owner. This is by inserting a new s118-195(1A).  [Item 11 in the draft Bill]
5. Also, the ‘deceased estate’ provisions don’t apply at all, if just before the deceased dies, the deceased was a foreign resident. This will be by inserting a new s118-195(3). [Item 13 of the draft Bill]
6. The provisions giving partial exemption to deceased estates and their beneficiaries (in s118-200, which apply if s119-195 doesn’t apply) are also changed to exclude non-residents [Items 14, 15 & 16]
7. Provisions about a trustee acquiring a dwelling under a will, in s118-210 are amended by inserting a new ss(6) so that they do not apply if the deceased was a non-resident just before they died [item 18 of the draft Bill].
8. Exemptions available to Trustees in s118-218 (the ‘main case’) are also amended by inserting a new ss(1)(d) adding a condition that the ‘principal beneficiary’ of the trust is not a non-resident [item 19 of the draft Bill].
9. Provisions about the amount of the exemption available after the principal beneficiary’s death, in s118-225 are to be amended by inserting a new ss(5) preventing these provisions applying if, the deceased was a non-resident, just before they died [item 20 of the draft Bill].
10. Provisions about CGT events happening only to adjacent land, in s118-245 are to be amended by inserting a new ss(3) preventing the provisions applying if the owner was a non-resident [item 21 of the draft Bill].

COMMENTS are due by 15 August 2017.

[Treasury website: consultation announcement; draft Bill; draft EM; FJM; LTN 137, 21/7/17]