Chartered Accountants Australia and New Zealand (CA ANZ) has lodged a submission on Treasury’s consultation paper, Strengthening the foreign resident capital gains tax regime.

The Consultation Paper seeks feedback on the design of the 2024-25 Budget measure to strengthen foreign resident capital gains tax (CGT) regime by:

• clarifying and broadening the types of assets on which foreign residents are subject to CGT under Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997)
• amending the point-in-time principal asset test (PAT) to a 365-day testing period
• requiring foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the Australian Taxation Office (ATO), in the approved form prior to the transaction being executed.

Our key issues with the Consultation Paper include:

• There is no grandfathering or transitional rule mentioned - Treasury should consider grandfathering or a transitional rule for foreign investors who have invested in existing long-term projects that have been treated as non-taxable Australian real property but may now be in scope for CGT, where they have acquired their investment before 14 May 2024, the date of the 2024-25 Federal Budget.
• Given the inconsistent treatment between the states and territories as to what is “real property”, we support the proposal to include a definition of “real property” for Division 855 purposes.
• To avoid too much uncertainty, the expansion of the foreign resident CGT base to cover assets with a close economic connection to Australian land/natural resources should be addressed by a specific list of assets under a new CGT asset category under section 855-15.
• Treasury should consult with industry to develop a list of assets that would have the appropriate close economic connection with Australian land and natural resources as infrastructure projects involve complex arrangements and some of the arrangements should not be captured by the expanded scope.
• A 365-day testing period for the PAT will be difficult to implement in practice and we recommend the inclusion of a compliance saving provision, allowing the foreign resident to reasonably conclude that the 365-day testing period is met without having to conduct daily valuations. There is also a risk of double taxation unless some assets are excluded from the testing period.
• Requiring foreign resident vendors to notify the ATO, in the approved form prior to the transaction being executed, will be difficult to implement in practice as the information required for the vendor declaration may still be subject to negotiation. The date of entry of the contract would be a better date to start the ATO’s review period from a practical perspective.