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  • Indirect Australian real property interests

    If you are a foreign resident, you can disregard a capital gain or loss from a CGT event if the CGT asset is not taxable Australian property. Taxable Australian property includes an indirect interest in Australian real property.

    You have an indirect Australian real property interest in an entity when that interest satisfies both of the:

    Two tests

    Non-portfolio interest test

    You pass the non-portfolio interest test if you and your associates together hold a 10% or more interest in another entity, including a foreign entity.

    Principal asset test

    Your interest passes this test if the market value of the assets of the entity in which you hold the interest is principally attributable to Australian real property.

    When we will take a closer look

    We will engage with you if you are a foreign resident disposing of taxable Australian property. We want to assist you to make sure you apply the two tests correctly to ensure you pay the correct amount of CGT.

    While most foreign residents get it right, we have identified some problems with:

    Structuring investments

    We look closely at arrangements where a foreign resident purposely structures their investment so that multiple entities (test entities) in which they have a non-portfolio interest each hold an interest in the same Australian entity of less than 10%.

    These arrangements typically display all or most of the following features:

    • A foreign resident has an interest in a capital gains tax asset that is taxable Australian real property.
    • The foreign resident has non-portfolio interests in at least two entities Each entity owns less than 10% of the membership interests in an Australian entity whose underlying value is principally derived from taxable Australian real property.
    • Disposal of the membership interests in the Australian entity will create a capital gains tax liability for the foreign resident and the investment is intentionally structured to hold less than 10% of membership interest in each entity.

    We are not concerned with membership interests below 10% that were already in place before the introduction of Division 855 of the Income Tax Assessment Act 1997.

    Attribution of value

    We look closely at arrangements where foreign residents decide they don't satisfy the principal asset test, and one or more of the following features exist:

    • A foreign resident entity disposes of some or all of their non-portfolio interests and hasn't engaged with us about the calculation.
    • The market values of the plant, buildings and improvements on land have not been included in the calculation of taxable Australian real property and are characterised as chattels.
    • A mining company attributes a significant portion of its value to mining information rather than the underlying mining right.
    • The foreign resident performs the principal asset test calculation on the basis that the market value of each asset is assessed as if each asset was the only asset offered for sale.
    • A foreign resident (or vendor) gives a direction to a third-party valuer that predetermines the classification or valuation of one or more assets being valued.

    Dissipation risk

    We will engage with foreign residents to ensure they meet their Australian tax obligation in relation to taxable Australian property, particular where:

    • the foreign resident has an interest in an asset that is taxable Australian property
    • the taxable Australian property is the foreign resident’s only asset (or interest in an asset) in Australia
    • the foreign resident owns additional Australian assets, but the market value of them is likely to be insufficient to cover the Australian tax liability associated with disposal of the taxable Australian property
    • the foreign resident has no Australian tax compliance history
    • foreign resident capital gains withholding is applied to the proceeds of the transaction and the amount withheld is unlikely to be sufficient to offset the final Australian tax obligation of the foreign resident.

    See also:

    Last modified: 12 Dec 2019QC 60944