Senate

Revised Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Removing the Capital Gains Tax Discount for Foreign Individuals

Outline of chapter

5.1 Schedule 7 to this Bill amends the Income Tax Assessment Act 1997 ( ITAA 1997) to remove the capital gains tax (CGT) discount on discount capital gains accrued after 8 May 2012 for foreign resident and temporary resident individuals.

5.2 All legislative references are to the ITAA 1997 unless otherwise stated.

Context of amendments

5.3 Currently, discount capital gains that are made by individuals may be reduced by a discount percentage before being included in assessable income. A CGT discount of 50 per cent is available to individuals regardless of tax residency status.

5.4 Generally, foreign and temporary resident individuals are only subject to CGT on taxable Australian property, which includes residential and commercial real estate and mining assets.

5.5 These assets are immobile and produce location specific returns. A reduction in the effective tax rate (by way of the CGT discount) is not necessary to attract foreign investment in these assets. Removing the CGT discount for foreign and temporary residents increases the return to Australia from gains made through foreign investment in Australian land.

5.6 As part of the 2012-13 Budget, the Government announced that the CGT discount would not apply to discount capital gains made by a foreign resident. However, the CGT discount will still apply to the portion of the discount capital gain of a foreign resident individual that accrued up until the date of announcement (8 May 2012).

5.7 As temporary residents are subject to CGT on the same basis as foreign residents, they will also be ineligible for the CGT discount.

5.8 These amendments will apportion the discount percentage applied to reduce discount capital gains to ensure that the full 50 per cent CGT discount is only available for periods in which an CGT asset was held:

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prior to 9 May 2012; and

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after 8 May 2012 during which the individual was an Australian resident.

Summary of new law

5.9 These amendments apply where:

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an individual was a foreign resident or a temporary resident at any time on or after 8 May 2012; and

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that individual makes a discount capital gain directly or indirectly as a beneficiary of a trust, from a CGT event that occurred after 8 May 2012; or

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a trustee who is taxed under section 98 of the Income Tax Assessment Act 1936 (ITAA 1936) in respect of an individual beneficiary, makes a discount capital gain from a CGT event that occurred after 8 May 2012.

5.10 The effect of the measure is to:

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retain access to the full CGT discount for discount capital gains of foreign and temporary resident individuals in respect of the increase in value of a CGT asset that occurred prior to 9 May 2012;

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remove the CGT discount for discount capital gains of foreign and temporary resident individuals that arise after 8 May 2012; and

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apportion the CGT discount for discount capital gains where an individual has been both an Australian resident and a foreign or temporary resident during the period after 8 May 2012.

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The discount percentage is apportioned to ensure the full discount (50 per cent) applies to periods when the individual was an Australian resident.

5.11 Where an Australian individual changes tax residency, the amendments will only apply to CGT assets that are taxable Australian property. This includes property characterised as taxable Australian property because an individual has chosen to disregard the CGT event triggered by their change in residency status (CGT event I1 may be disregarded under section 104-165).

5.12 Capital losses will continue to be offset against capital gains and net capital losses may still be carried forward.

5.13 These amendments are only intended to affect the discount percentage applied to a discount capital gain. These amendments do not affect other rules in the CGT regime, such as the application of the main residence exemption.

Comparison of key features of new law and current law

Detailed explanation of new law

5.14 These amendments reduce the discount percentage applicable to a discount capital gain of an individual where the individual was a foreign resident or temporary resident for some or all of the period that the CGT asset was held after 8 May 2012. [Schedule 7, item 6, subsection 115-105(1)]

5.15 The amendments also reduce the discount percentage applicable to a discount capital gain made by a trustee that is taxed under section 98 of the ITAA 1936 in respect of an individual beneficiary who was a foreign resident or temporary resident for some or all of the period that the CGT asset was held after 8 May 2012. This ensures comparable treatment for beneficiaries, regardless of whether they are taxed directly or the trustee is taxed on their behalf. [Schedule 7, item 6, subsection 115-120)]

5.16 The amendments apply to discount capital gains included in the assessable income of an individual irrespective of whether the CGT asset producing the gain was owned directly by the individual or held indirectly by a trust.

5.17 The amendments do not apply to reduce the discount percentage:

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where the CGT event occurred on or before 8 May 2012; or

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where an individual is an Australian resident at all times on or after 8 May 2012.

5.18 For CGT events occurring after 8 May 2012, the discount percentage applying to a discount capital gain from that event will depend on:

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whether the CGT asset was held on, or was acquired after, 8 May 2012;

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if the CGT asset was held on 8 May 2012, whether or not the individual was a resident on that date;

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whether a choice is made by an individual who was a foreign or temporary resident on 8 May 2012 to use the market value method to determine the part of the discount capital gain that accrued on and prior to that date; and

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the residency of the individual during so much of the period the CGT asset was held after 8 May 2012.

5.19 For CGT assets acquired after 8 May 2012 by an individual who was a foreign or temporary resident for the entire period the CGT asset was held, the discount percentage will be zero. This is because such individuals are no longer eligible for the CGT discount.

5.20 For CGT assets acquired prior to 9 May 2012, and CGT assets acquired after 8 May 2012 where the residency status of the individual owner changes during the time the CGT asset was held, the discount percentage is reduced to reflect the periods the individual was eligible for the CGT discount. This is achieved through several mechanisms outlined below (generally by pro-rating the discount percentage). [Schedule 7, item 6, section 115-115 ]

5.21 Individuals who were foreign or temporary residents on 8 May 2012 can receive the CGT discount for the gains from a CGT asset that accrued prior to the announcement of the measure. The market value of the CGT asset at 8 May 2012 is required to quantify the gain attributable to that earlier period. Individuals who do not have a market valuation will be ineligible for the CGT discount on pre-announcement gains. This is regardless of whether the individual made the discount capital gain directly or as a result of being a beneficiary of a trust. [Schedule 7, item 6, subsections 115-115(3) to (6)]

5.22 In circumstances where a trustee is taxed under section 98 of the ITAA 1997 in respect of an individual beneficiary, the discount percentage will be worked out on the basis the individual made the gain.

5.23 In order for an individual (or a trustee taxed under section 98 of the ITAA 1936) to determine their reduced discount percentage, they will need to determine the following:

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the 'discount testing period' applicable to the discount capital gain; and

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which discount percentage formula from section 115-115 applies to that discount capital gain.

Determining the discount testing period

5.24 The discount testing period is the period over which the CGT discount is apportioned in order to take account of a relevant individual's tax residency status.

5.25 The start and end of the discount testing period depends on whether the individual made the discount capital gain directly or indirectly, and if the latter, on the type of trust and who is taxed.

Individuals with direct gains

5.26 For CGT assets that are directly disposed of by an individual, the discount testing period commences on the day the individual acquired the CGT asset and ends on the day the CGT event happens. [Schedule 7, item 6, paragraph 115-105(2)(d)]

5.27 CGT assets to which these amendments apply may be subject to CGT roll-overs or acquired as a result of the death of an individual. Special rules about the time of acquisition are prescribed in the current law (in section 115-30). The discount testing period commences in accordance with the date of acquisition as prescribed in those rules.

5.28 In general, an individual is treated as having acquired the CGT asset when the earlier owner of the CGT asset acquired it. The individual is also treated as having the same residency status as that of the first individual during the relevant period. [Schedule 7 item 6, subsection 115-105(3)]

Example 5.49

Dominic is a resident of France. On 1 January 2011 he entered into a contract to purchase a new property in Sydney. On 1 July 2012 Dominic entered into a contract to sell the property.

Dominic's discount testing period commences on 1 January 2011 and ends on 1 July 2012.

Example 5.50

Samantha is an Australian resident. On 1 July 2012, Samantha's grandmother died and Samantha inherited land in Victoria's Yarra Valley that was purchased by her grandmother under a contract entered into on 1 January 2011. Samantha's grandmother was a tax resident of the United Kingdom. On 1 January 2013 Samantha sold the land.

Samantha's discount testing period commences on 1 January 2011 and ends of 1 January 2013.

Example 5.51

Renee is a resident of South Africa and is a partner of Partnership ABC. On 1 January 2011, Partnership ABC entered a contract to purchase a new property in Sydney. On 1 July 2012 Partnership ABC entered a contract to sell the property.

Section 106-5 deems that any capital gain arising from a partnership asset is made by the partners. Renee's discount testing period commences on 1 January 2011 and ends on 1 July 2012.

Individuals with gains as a result of an interest in a fixed trust

5.29 Where an individual has a discount capital gain as a result of an interest it held in a fixed trust, the discount testing period commences on the most recent day the individual became a beneficiary of the trust and ends on the day the individual made the gain. [Schedule 7, item 6, table item 1 in subsection 115-110(2)]

5.30 This discount testing period applies regardless of whether the trustee of the fixed trust held the CGT asset directly or received the capital gains indirectly as a result of an interest in another trust.

5.31 This approach overcomes difficulties that individuals may face in identifying the date of acquisition and disposal of a CGT asset where the CGT asset is held through a trust or a chain of trusts. It also reflects the decision of the individual to participate in the investment providing the capital gain.

5.32 The discount testing period commences on the 'most recent day you became a beneficiary'. Where an individual ceases to be a beneficiary of a fixed trust for a period of time, and later reacquires an interest in the same trust, the later date is the relevant start date for the discount testing period.

5.33 However, where an individual has an interest in the fixed trust and acquires a further interest at a later day, the discount testing period commences from the earlier acquisition date. This outcome is appropriate because the entity did not cease to be a beneficiary during the period, regardless of the fact its interest in the fixed trust increased.

Example 5.52

Dominic is a resident of France. On 19 May 2010, Dominic acquired an interest in a fixed trust. He acquired further units on 30 July 2012.

The trust owns various properties that it acquired between 1987 and 2009. On 1 July 2012, the fixed trust disposed of a property that it acquired in 2011. The trustee makes a capital gain from the property, which is included in the net income of the trust.

Dominic is presently entitled to income of the fixed trust for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property.

Dominic's discount testing period commences on 19 May 2010 and ends on 30 June 2013.

Example 5.53

Peter is a resident of Turkey. On 1 January 2011, he purchased an interest in a property trust in Australia that is not a managed investment trust (an indirect Australian real property interest).

On 30 June 2012, Peter is presently entitled to the income of the trust for the 2011-12 income year and is assessable on a share of the net income of the trust that includes a discount capital gain.

Peter's discount testing period for that discount capital gain commences on 1 January 2011 and ends on 30 June 2012.

On 30 June 2013, Peter is presently entitled to income of the trust for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain. His discount testing period for that discount capital gain commences on 1 January 2011 and ends on 30 June 2013.

5.34 Where an interest in a fixed trust is acquired as a result of a CGT roll-over or the death of an individual, the rules in section 115-30 apply. These rules prescribe the time the interest was deemed to have been acquired as the time the earlier owner of the interest acquired it. The beneficiary is treated as having the same residency status as that of the first individual during the relevant period.

5.35 However, in the case where an individual held an interest in a fixed trust and then received another interest in that fixed trust as a result of the death of an individual, the earliest acquisition date is the relevant date for the discount testing period.

Example 5.54

Renee is a resident of Spain. On 19 May 2010, Renee acquired an interest in a fixed trust. On 1 August 2012, Renee inherits, as part of a deceased estate, another interest in the fixed trust. Renee's mother-in-law (deceased) acquired the interest in the fixed trust (first became a beneficiary) on 1 April 2005,

On 1 July 2012, fixed trust X disposed of a property that it acquired in 2011. The trustee makes a capital gain from the property, which is included in the net income of the trust. Renee is presently entitled to income of fixed trust X for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property.

Renee's discount testing period for that discount capital gain commences on 1 April 2005 and ends on 30 June 2013. Renee is also deemed to have the same residency status as her mother-in-law, for the purposes of section 115-115, for the period of 1 April 2005 until 1 August 2012.

Example 5.55

Using the example above, except Renee's mother-in-law acquired the interest in the fixed trust (first became a beneficiary) on 1 April 2011. On 19 May 2010, Renee acquired an interest in the fixed trust.

Renee's discount testing period commences on 19 May 2010 and ends on 30 June 2013. This is because Renee first became of beneficiary of the fixed trust on 19 May 2010. The deemed acquisition of her mother in law's interest (as a result of the deceased estate) increased the size of her interest in the fixed trust and does not extend the discount testing period. The residency status of Renee's mother in law during the discount testing period is also irrelevant.

Individuals with gains as a result of an interest in a non-fixed trust

5.36 Generally, an individual beneficiary of a non-fixed trust (for example a discretionary trust) does not hold a quantifiable interest in the trust. Consequently, special discount testing period rules apply to identify when the discount testing period commences for these beneficiaries. These rules effectively disregard the non-fixed trust and treat the individual beneficiary as though it held the CGT asset or interest in a fixed trust (held by the trustee of the non-fixed trust) directly.

5.37 Where the trustee of a non-fixed trust directly held the CGT asset, the discount testing period for the beneficiary commences on the day the trustee of the non-fixed trust acquired that CGT asset. The same applies for an interest in a fixed trust, with the discount testing period commencing on the day the non-fixed trust trustee acquired the interest in the fixed trust. [Schedule 7, item 6, table item 2 in subsection 115-110(2)]

5.38 The discount testing period will always end on the day the individual beneficiary made the gain. Generally, this will be the end of the income year.

Example 5.56 Dominic is a resident of France. On 1 January 2011 non-fixed trust purchased a new property in Sydney. On 1 July 2012, the non-fixed trust sold the property. Dominic is presently entitled to income of the fixed trust for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property. Dominic's discount testing period commences on 1 January 2011 and ends on 30 June 2013.

5.39 Where an individual is a beneficiary through a chain of non-fixed trusts, the discount testing period is determined by reference to the first trustee in the chain that holds either an interest in a fixed trust or a direct interest in the CGT asset itself.

5.40 The discount testing period commences at the time that the non-fixed trust trustee acquired the relevant fixed trust interest or relevant CGT asset. If the CGT asset is directly held by a fixed trust, it is the interest in that fixed trust that is relevant for the purposes of the discount testing period of the beneficiary of the non-fixed trust.

Example 5.57

Dominic is a resident of France. On 1 January 2011 non-fixed trust X purchased a new property in Sydney. On 1 July 2012, non-fixed trust X sold the property.

On 1 January 2013, non-fixed trust X makes non-fixed trust Y 'specifically entitled' to the capital gain relating to the sold property.

Dominic is presently entitled to the income of non-fixed trust Y for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property.

Dominic's discount testing period commences on 1 January 2011 and ends on 30 June 2013.

In instances where a trustee does not distribute the income the normal trust rules apply.

5.41 The discount testing period commences on the most recent day the non-fixed trust trustee became a beneficiary of the fixed trust. 'The most recent day' is discussed in detail at paragraphs 7.32 and 7.33. [Schedule 7, item 6, table item 3 in subsection 115 - 110(2)]

Example 5.58

Non-fixed trust X purchased an interest in fixed trust Y on 1 January 2011. On 1 August 2012, fixed trust Y sells an Australian real property asset acquired in 2008.

On 1 September 2012, non-fixed trust X is made 'specially entitled' to the capital gain made by fixed trust Y.

Dominic is presently entitled to the income of non-fixed trust X for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property.

Dominic's discount testing period commences on 1 January 2011 and ends on 30 June 2013.

Example 5.59

Non-fixed trust X purchased an interest in fixed trust Y on 1 January 2011. On 1 September 2012, non-fixed trust X was made 'specifically entitled' to the capital gain made by fixed trust Y.

On 1 January 2013, non-fixed trust X makes non-fixed trust Z 'specifically entitled' to the capital gain.

Dominic is presently entitled to the income of non-fixed trust Z for the 2012 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property.

Dominic's discount testing period commences on 1 January 2011 and ends on 30 June 2013.

Individual beneficiary - Trustee taxed under section 98

5.42 Where a trustee is assessed on a discount capital gain under section 98 of the ITAA 1936 in respect of an individual beneficiary, the trustee will reduce the discount percentage to reflect only the period that the individual beneficiary was an Australian tax resident. [Schedule 7, item 6, section 115-120)]

5.43 The discount testing period applied to the trustee is determined as if the beneficiary had made the discount capital gain.

Example 5.60

Dominic is a resident of France. On 1 January 2011, he purchased an interest in a fixed trust.

Dominic is presently entitled to income of the fixed trust for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property. Because Dominic is a foreign resident at the end of the income year, subsection 98(2A) of the ITAA 1936 applies and the trustee is assessed in accordance with section 115-220 of the ITAA 1997.

The trustee's discount testing period commences on 1 January 2011 and ends on 30 June 2013.

Example 5.61

Dominic is a resident of France. On 1 January 2011, a non-fixed trust purchased a property in Sydney. On 1 May 2014, the non-fixed trust sells the property.

Dominic is presently entitled to income of the non-fixed trust for the 2012-13 income year and is assessable on a share of the net income of the trust that includes a discount capital gain relating to the sold property. Because Dominic is a foreign resident at the end of the income year, subsection 98(2A) of the ITAA 1936 applies and the trustee is assessed in accordance with section 115-220 of the ITAA 1997.

The trustee's discount testing period commences on 1 January 2011 and ends on 1 May 2014.

Calculating the discount percentage

Assets acquired after 8 May 2012

5.44 Individuals that are an Australian resident and acquire CGT assets after 8 May 2012 and do not change their tax residency are not subject to these amendments. The full discount percentage of 50 per cent applies.

5.45 Where the discount testing period commences after 8 May 2012 and the individual is a foreign or temporary resident for some or all of that period, then they are subject to these amendments. The discount percentage will be adjusted to reflect only that proportion of the discount testing period that the individual was an Australian resident. [Schedule 7, item 6, subsection 115-115(2)]

5.46 The discount percentage is calculated under the following formula:

5.47 If the individual was a foreign resident or temporary resident for the entire discount testing period the discount percentage will be zero.

Example 5.62 : Asset acquired after 8 May 2012 and the individual is a foreign resident during part of the discount testing period

XYZ fixed trust acquires a taxable Australian property asset on 1 January 2014 for $10,000. XYZ fixed trust then sells the asset on 1 January 2016 for $20,000. XYZ fixed trust makes a distribution including the discount capital gain to its beneficiaries on 30 June 2016 (assume this is when those beneficiaries become presently entitled for the 2015-16 income year).

There are two beneficiaries of XYZ trust, each holding a 50 per cent interest in the trust. The first is Lucas, who has been a beneficiary of the trust since 1 January 2013 and has been an Australian resident for the entire period.

The other beneficiary is Lachlan. Lachlan has also been a beneficiary of the trust since 1 January 2013. Lachlan was a foreign resident individual until 1 January 2015, when he became an Australian resident.

The capital gains of the XYZ trust is $10,000 against which it applies the full discount percentage (50 per cent). Lucas and Lachlan are both presently entitled to $2,500 each.

Applying the rules in Subdivision 115-C, both Lachlan's and Lucas's capital gains are grossed up so that they have a discount capital gain of $5,000 each.

Lucas' discount testing period commences 1 January 2013 and ended on 30 June 2016. As Lucas has not been a foreign or temporary resident during any of the discount testing period, the amendments do not apply to his share of the gain. Therefore, he is entitled to the full discount percentage of 50 per cent.

Lachlan's discount testing period also commences 1 January 2013 and ended on 30 June 2016. Lachlan has been a foreign resident during the discount testing period and therefore is subject to sections 115-110 and 115-115.

As Lachlan's interest in the fixed trust was acquired after 8 May 2012, Lachlan must calculate the discount percentage under the formula in subsection 115-115(2). Therefore, Lachlan's discount percentage is,

Assets acquired prior to 9 May 2012

5.48 Individuals that were Australian residents on 8 May 2012 and at all times after 8 May 2012 are not subject to these amendments. The full discount percentage of 50 per cent applies.

5.49 Individuals that were foreign or temporary residents on 8 May 2012 (being the date of announcement) retain access to the full CGT discount for gains accrued up to that date. Such individuals must choose to use the market value to quantify the gain (the market value method is explained in further detail below).

5.50 The discount percentage that applies to gains accrued after 8 May 2012 is calculated on an apportionment basis taking into account the relevant individual's residency during the discount testing period. The discount percentage will reflect the proportion of the period after 8 May 2012 until the gain was made that the individual was an Australian resident.

5.51 Similarly, where the individual makes a discount capital gain as a beneficiary of a fixed trust, the discount percentage will be adjusted to reflect the proportion of the period after 8 May 2012 until the gain was made that the individual was an Australian resident.

Foreign or temporary resident on 8 May 2012 and the individual has chosen market value

5.52 To ensure gains accrued on the CGT asset prior to 9 May 2012 remain eligible for the full CGT discount, an individual who was a foreign or temporary resident on 8 May 2012 may obtain a market valuation of that asset.

5.53 The balance of any gain on the CGT asset accrued after 8 May 2012 will be subject to a discount percentage that is apportioned to reflect the period after 8 May 2012 that the individual was an Australian resident.

5.54 The market value method can only be used in respect of a discount capital gain where the gain is:

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made by an individual that was a foreign or temporary resident on 8 May 2012; and

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from a CGT asset acquired prior to 9 May 2012.

5.55 In addition to those requirements:

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the discount testing period for the discount capital gain must have commenced prior to 9 May 2012;

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the CGT asset's market value at 8 May 2012 cannot be less than its cost base (it must have increased in value); and

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the individual must choose to use the market value method.

[Schedule 7, item 6, subsections 115-115(4) and (5)]

5.56 If an individual is eligible and chooses to use the market value method, the discount percentage for the discount capital gain is calculated as follows:

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Step 1 - Calculate the CGT asset's 'excess'.

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The excess is the increase in value of the asset that has accrued prior to 9 May 2012. It is calculated as the amount by which the CGT asset's market value at 8 May 2012 exceeds its cost base at 8 May 2012. [Schedule 7, item 5, paragraph 115-115(4)(d)]

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If the excess is equal to or greater than the total discount capital gain from the CGT asset, the full discount percentage of 50 per cent applies as the total gain accrued prior to 8 May 2012. This ensures that there is no reduction in the discount percentage where the value of the CGT asset has fallen between 8 May 2012 and the end of the discount testing period. [Schedule 7, item 6, subsection 115-115(4)]

•

Step 2 - If the excess is less than the discount capital gain from the CGT event, that is the value of the CGT asset increased after 9 May 2012, the discount percentage is worked out using the following formula:

[Schedule 7, item 6, subsection 115-115(5)]

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The shortfall is the net increase in the value of the CGT asset accrued after 8 May 2012. This is calculated by subtracting the excess (amount of the capital gain accrued prior to 9 May 2012) from the amount of the total discount capital gain.

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The number of apportionable days means the number of days after 8 May 2012 during the discount testing period.

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The number of apportionable days that you were an eligible resident is the number of days after 8 May 2012 during the discount testing period that the individual was an Australian resident (but not a temporary resident).

5.57 In circumstances where the CGT asset or an interest in a fixed trust (that the capital gain was attributable to) was subject to section 115-30 (rules regarding acquisition when the asset has been subject to a roll-over), the apportionable days and residency status of the previous owner of the asset or interest in the fixed trust will be relevant.

5.58 Where an individual chooses to apply the market value method, the general CGT record keeping requirements (see section 121-20) must be satisfied. This means that a market valuation must be undertaken and the record of that valuation must be kept. The time at which the valuation must be performed is not prescribed.

Example 5.63 : Asset acquired before 9 May 2012 and the market value method is used. However, the gain at 8 May 2012 exceeds the discount capital gain

Dominic is a resident of France. On 1 January 2011 he purchased a property in Sydney for $1,000,000. On 8 May 2012 the property was valued at $1,100,000. On 1 July 2012 Dominic sold the property for $1,050,000.

Dominic has a discount capital gain from the disposal of the property of $50,000.

As Dominic is a foreign resident, the discount percentage applicable to the gain may be adjusted by this measure.

For the purposes of determining the discount percentage, Dominic chooses to use the market value method. The discount percentage is worked out as follows:

•

Calculate the CGT asset's excess .

$1,100,000 ? $1,000,000 = $100,000

As the amount of the gain accrued before 9 May 2012 of $100,000 is greater than the total discount capital gain of $50,000 from the disposal of property the full discount percentage of 50 per cent applies. [Schedule 7, item 6, subsection 115-115(4)]

Example 5.64 : Asset acquired before 9 May 2012 and market value is used

Samantha is an Australian resident. On 1 July 2012, Samantha's grandmother died and Samantha inherited land in Victoria's Yarra Valley that was purchased on 1 January 2011 for $10,000,000. Samantha's grandmother was a tax resident of the United Kingdom.

On 8 May 2012, Samantha's land was valued at $11,000,000. On 1 January 2013 Samantha sold her land for $12,000,000.

Samantha has a total discount capital gain from the disposal of the land of $2,000,000.

As Samantha is a resident for part of the discount testing period, the discount percentage applicable to the gain is determined by reference to the amendments introduced in this bill.

Furthermore, because item 4 of section 115-30 applies to the CGT asset (as Samantha received the CGT asset as the beneficiary of a deceased estate), Samantha's grandmother's residency status and previous holding are relevant for determining the discount percentage. As Samantha's grandmother held the CGT asset on 8 May 2012, her residency status requires that Samantha calculate the discount percentage under subsection 115-115(4) or (6).

For the purposes of determining the discount percentage, Samantha chooses to use the market value method. The discount percentage is worked out as follows:

Step 1 Calculate the CGT asset's excess .

$11,000,000 x $10,000,000 = $1,000,000

Step 2 As the excess is less than the discount capital gain ($2,000,000) from the CGT event, the discount percentage is worked out using the following figures:

•

the shortfall amount is $1,000,000 ($2,000,000 less the excess );

•

the number of apportionable days Samantha was an eligible resident is 185 days (that is, days Samantha and her grandmother were an eligible resident);

•

the number of apportionable days is 238 days (that is, the number of apportionable days taking into account Samantha and her grandmother's holding of the CGT asset); and

•

twice the amount of discount capital gain is $4,000,000.

Therefore, Samantha's discount percentage is:

Individual is a foreign or temporary resident on 8 May 2012 and has not chosen market value

5.59 Where an individual does not choose to use the market value method in respect of a CGT asset that is acquired prior to 9 May 2012 (and which has a discount period commencing prior to that date), the discount percentage is calculated using the following formula:

[Schedule 7, item 6, subsection 115-115(6)]

5.60 The effect of not choosing the market value method is that the CGT discount is not available for gains accrued prior to 8 May 2012. The CGT discount remains available for periods after 8 May 2012 that the individual was an Australian resident. The formula achieves this affect by calculating the CGT discount as the time during the period after 8 May 2012 that the individual was an Australian resident as a proportion of the total time that the CGT asset or interest in the fixed trust was held.

Example 5.65 : Asset acquired before 9 May 2012 and market value method is not used

Applying the facts described in Example 6.15, if Dominic did not choose to apply the market value, his discount percentage applicable to the discount capital gain of $50,000 would be:

Example 5.66

Applying the facts described in Example 6.16, if Samantha did not choose to apply the market value, her discount percentage applicable to the discount capital gain of $2,000,000 would be:

Resident individual on 8 May 2012

5.61 If an individual makes a discount capital gain from a CGT event occurring after 8 May 2012 and was:

•

an Australian resident (but not a temporary resident) on 8 May 2012; and

•

a foreign or temporary resident at any time during the period after 8 May 2012,

the discount percentage is apportioned to reflect all days in the period of ownership after 8 May 2012 that the individual was an Australian resident.

5.62 This is achieved by applying the following formula:

[Schedule 7, item 6, subsection 115-115(3)]

5.63 This approach results in the discount percentage being determined on the basis that the individual was eligible for the CGT discount for the entire period it owned the asset or interest in the fixed trust prior to 9 May 2012. The discount percentage is reduced for any part of the period after 8 May 2012 in which the individual was not eligible for the CGT discount (that is, any period in which the individual was a foreign or temporary resident).

Example 5.67 : Resident individual on 8 May 2012

XYZ Trust buys an asset on 1 January 2010 for $10,000. XYZ trust then sells the asset on 1 January 2016 for $50,000.

There are two beneficiaries of the trust, each holding a 50 per cent interest in the trust. One of the beneficiaries is Lucas, who has been a beneficiary of the trust since 1 January 2011 and was an Australian resident individual until and including 31 December 2014 (after which time he became a foreign resident).

The discount capital gain of the XYZ trust is $40,000, against which it applies the full discount percentage (50 per cent). Lucas is presently entitled to $10,000 at the end of the income year. Therefore, Lucas makes the gain on 30 June 2016.

Applying the rules in Subdivision 115-C, Lucas's capital gain is grossed up so that he has a discount capital gain of $20,000.

Lucas is subject to section 115-110 and subsection 115-115(3) as he is an individual, was a resident at 8 May 2012, has been a foreign resident individual during the discount testing period and received a discount capital gain as a beneficiary of a trust.

Lucas is subject to subsection 115-115(3) because he was an Australian resident on 8 May 2012.

The relevant dates for the discount testing period are 1 January 2011 (this is the date Lucas became a beneficiary of the fixed trust) and 30 June 2016. Therefore, the following numbers are relevant:

•

the number of days in the discount testing period is 2008 days;

•

the number of apportionable days Lucas was a foreign or temporary resident is 547 days; and

•

two times the number of days in the discount testing period is 4016 days.

Therefore, applying subsection 115-115(3), Lucas' discount percentage is:

Application and transitional provisions

5.64 The measure applies to CGT events that occur after 8 May 2012.

5.65 Gains accrued prior to 9 May 2012 remain eligible for the full CGT discount if the individual chooses to obtain market valuation of the asset as at 8 May 2012.

Consequential amendments

5.66 Consequential amendments are required to make references to the new sections 115-105, 115-110 and 115-115 in other areas of the tax law. [Schedule 7, items 1 to 4, subsection 115-30(1) and section 115-100 ]

5.67 An amendment is also required to the main discount percentage provision to ensure the discount percentage resulting from section 115-115 applies. [Schedule 7, item 5, subsection 115-100 ]

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Removing the Capital Gains Tax Discount for Foreign Individuals

5.68 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

5.69 This Schedule amends the Income Tax Assessment Act 1997 to remove the CGT discount on discount capital gains accrued after 8 May 2012 for foreign resident and temporary resident individuals.

Human rights implications

5.70 In the context of this Schedule, and international taxation practice more generally, the differentiation of treatment between Australian residents and foreign residents is considered reasonable and justified.

5.71 There is a well-established body of international law and practice recognising that taxation laws of a State can differentiate between the tax treatment of residents of that State and the tax treatment of residents of other States. For example, treaties to prevent double taxation use residence status as a way to allocate taxing rights between States. At the same time, discrimination between residents of the same State on the basis of their nationality is prohibited. This Schedule does not differentiate on the basis of nationality but on residency for the purposes of tax treatment.

5.72 The different treatment applied in this measure, of taxpayers according to their residence status (as opposed to their nationality), is consistent with that body of international law and practice.

5.73 The differentiation between foreign residents and Australian residents is a feature of the existing law relating to the taxation treatment of capital gains. Foreign residents are only subject to CGT if the CGT event happens in relation to a CGT asset that is taxable Australian real property. For Australian residents, CGT applies to all CGT assets (including non-real property) held anywhere in the world.

5.74 There is no basis to conclude that the treatment accorded foreign residents in this Schedule amounts to discrimination on the basis of 'other status' under the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Conclusion

5.75 This Schedule is compatible with human rights as it does not raise any human rights issues.

Assistant Treasurer, the Hon David Bradbury