In a significant development, the Government will expand the scope of capital gains tax for non-residents. The details of the changes are unclear and subject to consultation, but it appears that the scope of ‘taxable Australian property’ will be materially expanded. Additionally, a new reporting regime will be established to require non-residents to notify the ATO before entering any transaction to dispose of membership interests exceeding $20m.
In a welcome development, the previously announced measures to deny deductions for payments offshore in respect of intangibles has been axed as those measures will be addressed through the Global Minimum Tax and Domestic Minimum Tax being implemented by the Government.
Also, a new integrity measure will be introduced for certain multinationals that mischaracterise or undervalue royalty payments.
CGT net to be expanded for non-residents
The Government has announced dramatic changes to the capital gains tax (CGT) regime for non-residents. The following amendments are proposed to commence on or after 1 July 2025 (subject to further consultation):
- ‘clarify’ and ‘broaden’ the scope of taxable Australian property (TAP);
- amend the point-in-time principal asset test to a 365-day testing period for indirect interests; and
- require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.
Currently, non-residents are only subject to CGT in respect of assets that are TAP. TAP assets include assets that are direct or indirect interests in ‘taxable Australian real property’ (e.g., land or similar interests) and rights in respect of such interests (e.g., options). When assessing whether non-residents hold ‘indirect’ interests in TAP (i.e., via a company or trust or a chain of such entities), the current test – the principal asset test –tests whether more than 50% of the value of the assets of an Australian entity is attributable to ‘taxable Australian real property’ at a particular point in time.
The proposed measures will both expand the scope of the assets to which the TAP test applies as well as include a new averaging rule to apply the principal asset test over a year.
The extent to which the scope of assets covered by TAP will be expanded is not clear - the only clue being the Government’s reference to ‘assets with a close economic connection to Australian land’, suggesting some connection to Australian land will be required. However, the measures are expected to increase receipts by $600m so it is anticipated that the Government is proposing more than mere tinkering around the edges.
Additionally, a new reporting regime will require foreign residents disposing of shares and other membership interests exceeding $20m in value to notify the ATO prior to the transaction being entered into. This measure builds on the existing foreign resident CGT withholding tax regime, under which purchasers are broadly required to withhold and pay to the ATO (currently at the rate of 12.5%) from payments to non-resident sellers of TAP. The reporting regime will now require vendors to notify the ATO in respect of transactions where the parties may have formed the view that the assets are not TAP so CGT withholding would not prima facie apply. Non-resident vendors complying with the new notification regime can expect scrutiny from the ATO in relation to how such transactions will be treated – all this to be done at a time prior to signing which could delay transactions.
The Government has stated they will consult on the changes to the TAP rules.
Controversial intangibles measures axed…but not entirely
The Government has announced the discontinuance of the controversial measure to deny deductions for payments relating to intangibles held in low- or no-tax jurisdictions that was announced in the 2022–23 October Budget (see our update for more detail on those measures here).
The Government has accepted what many have been saying about the measures, that the integrity issues will now be addressed through the OECD Pillar 2 Global Minimum Tax and Domestic Minimum Tax being implemented by the Government (see our update here for more details).
However, the Government has stated it will separately introduce a new provision from 1 July 2026 that applies a penalty to taxpayers who are part of a corporate group with more than $1b in global turnover annually that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. This is likely to cause some taxpayers consternation as there are differing views as to what types of payments constitute “royalties”.
