Senate

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)

CHANGE OF TITLE - TAX LAW IMPROVEMENT BILL (No. 1) 1998 - SENATE - Explanatory Memorandum.

Chapter 2.22 - Non-residents

Overview

This segment deals with rules about non-resident entities contained in Division 136.

Part A summarises these rules.

Part B explains the changes to the 1936 Act.

Part C explains why some provisions have not been rewritten.

A. Summary of the new law

Subdivision 136-A: Making a capital gain or loss

What the Subdivision does

Subdivision 136-A applies in relation to a non-resident entity who makes a capital gain or loss only if:

•

there is a CGT event concerning an asset that has a necessary connection with Australia; or

•

CGT events D1 or E9 apply (which are, respectively, about creating contractual or other rights and creating a trust over future property).

CGT assets that have a necessary connection with Australia

The CGT rules treat the following categories of assets owned by non-residents as having a sufficient connection with Australia:

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land, buildings or structures in Australia, including stratum units and shares in companies that confer occupancy rights;

•

assets used in carrying on business through a permanent establishment in Australia;

•

shares in a private company that is an Australian resident;

•

an interest in a resident trust;

•

units in a resident trust 10% or more of whose units were held by non-residents;

•

shares in a public company that is an Australian resident 10% or more of whose shares were held by non-residents; options to acquire assets in any of the above categories;

•

shares or securities in a company received in connection with the roll-over of a CGT asset to a wholly-owned company.

[section 136-25]

Table of CGT assets having the necessary connection

A table identifies the categories of CGT assets having the necessary connection with Australia for each CGT event. [section 136-10]

CGT events D1 and E9

There are also tables of circumstances in which CGT events D1 and E9 (which involve the creating of CGT assets) apply to non-residents. [section 136-15]

CGT events not applicable to non-residents

Finally, there is a table of CGT events that do not apply to non-residents. [section 136-20]

Subdivision 136-B: Becoming a resident

B. Discussion of changes

New Dictionary term

Change

Section 995-1 of the Income Tax Assessment Act 1997 will be amended to insert an additional definition necessary connection with Australia in the Dictionary. This replaces the concept taxable Australian asset used in the existing law but has no practical effect other than to improve clarity.

Section 136-10 Clarifying which CGT events apply to non-residents

Change

Express more clearly the circumstances in which CGT applies to non-residents, ie. involves an asset with a necessary connection with Australia.

Explanation

In the case of non-residents, the 1936 Act focuses on the disposal of taxable Australian assets but is less than clear in its application where there are deemed disposals of assets. The rewritten law clearly sets out how and when CGT events apply to non-residents. The following table identifies cases where the 1936 Act is less than clear and how the corresponding CGT event applies to non-residents.