Show download pdf controls
  • Capital gains tax changes to the principal asset test

    On 9 May 2017 the Government announced that it would modify Australia's foreign resident capital gain tax (CGT) regime. This change will improve the integrity of the regime by applying the principal asset test on an associate inclusive basis from 7.30pm (AEST) on 9 May 2017, for foreign tax residents with indirect interests in Australian real property. This will ensure that foreign tax residents cannot avoid a CGT liability by disaggregating indirect interests in Australian real property.

    The modification to the foreign resident CGT regime clarifies that the principal asset test will be applied on an associate inclusive basis for the purpose of determining whether an entity’s underlying value is principally derived from taxable Australian real property (TARP). For these purposes, if the entity being tested holds a membership interest in another entity, the membership interest is treated as if it were two assets — a TARP asset and a non-TARP asset. However, the market value of the TARP asset is taken to be nil if the total participation interests held by the holding entity and its associates in the other entity is less than 10 per cent.

    Background

    Under the foreign resident CGT regime, a capital gain or capital loss made by a foreign resident in respect of a membership interest is disregarded unless both the non-portfolio interest test and the principal asset test are satisfied.

    The principal asset test applies in relation to certain membership interests held by a foreign resident entity in another entity, and is satisfied if the market value of the other entity’s TARP assets exceeds the market value of its non-TARP assets.

    Prior to this amendment, the market value of the TARP asset was taken to be nil if the entity's direct participation interest, or the holding entity's total participation interest in the other entity was less than 10 per cent.

    Administrative treatment

    The ATO will accept tax returns as lodged during the period up until the proposed law change is passed by Parliament. Past year assessments will not be reviewed until the outcome of the proposed amendment is known.

    After the new law is enacted, taxpayers will need to review their positions.

    Those taxpayers who lodged their tax return in accordance with the changes do not need to do anything more.

    Those taxpayers who did not return their capital gain will need to seek amendments.

    No tax shortfall penalties will be applied and any interest accrued will be remitted to the base interest rate up to the date of enactment of the law change. In addition, any interest in excess of the base rate accruing after the date of enactment will be remitted where taxpayers actively seek to amend assessments within a reasonable timeframe after enactment.

    Legislation and supporting material

    The Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures No. 2) Bill 2018External Link was introduced to Parliament on 8 February 2018.

    More information

      Last modified: 13 Feb 2018QC 54553