Tax Laws Amendment (2006 Measures No. 4) Act 2006 (168 of 2006)

Schedule 4   CGT and foreign residents

Part 1   Main amendments

Income Tax Assessment Act 1997

2   At the end of Part 4-5

Add:

Division 855 - Capital gains and foreign residents

Table of Subdivisions

Guide to Division 855

855-A Disregarding a capital gain or loss by foreign residents

855-B Becoming an Australian resident

Guide to Division 855

855-1 What this Division is about

A foreign resident can disregard a capital gain or loss unless the relevant CGT asset is a direct or indirect interest in Australian real property, or relates to a business carried on by the foreign resident through a permanent establishment in Australia.

Special rules apply for individuals who were Australian residents but have become foreign residents (see also Subdivision 104-I) and for foreign resident beneficiaries of fixed trusts.

There are also rules dealing with what happens when a foreign resident becomes an Australian resident.

Subdivision 855-A - Disregarding a capital gain or loss by foreign residents

Table of sections

855-5 Objects of this Subdivision

855-10 Disregarding a capital gain or loss from CGT events

855-15 When an asset is taxable Australian property

855-20 Taxable Australian real property

855-25 Indirect Australian real property interests

855-30 Principal asset test

855-35 Reducing a capital gain or loss from a business asset - Australian permanent establishments

855-40 Capital gains and losses of foreign residents through fixed trusts

855-5 Objects of this Subdivision

(1) The objects of this Subdivision are to improve:

(a) Australia's status as an attractive place for business and investment; and

(b) the integrity of Australia's capital gains tax base.

(2) This is achieved by:

(a) aligning Australia's tax laws with international practice; and

(b) ensuring interests in an entity remain subject to Australia's capital gains tax laws if the entity's underlying value is principally derived from Australian real property.

855-10 Disregarding a capital gain or loss from CGT events

(1) Disregard a *capital gain or *capital loss from a *CGT event if:

(a) you are a foreign resident, or the trustee of a *foreign trust for CGT purposes, just before the CGT event happens; and

(b) the CGT event happens in relation to a *CGT asset that is not *taxable Australian property.

Note: A capital gain or capital loss from a CGT asset you have used at any time in carrying on a business through a permanent establishment in Australia may be reduced under section 855-35.

(2) The *CGT asset in relation to which a *CGT event happens includes the following:

(a) for CGT event D1 (about creating contractual or other rights) - the CGT asset that is the subject of the creation of the contractual or other rights;

Example: You grant an easement over land in Australia. The land is the subject of the creation of the rights in the easement. Therefore, the CGT event happens in relation to the land.

(b) for CGT event D2 (about granting an option) - the CGT asset that is the subject of the option;

(c) for CGT event F1 (about granting a lease) - the CGT asset that is the subject of the lease;

(d) for CGT event J1 (about a company ceasing to be a member of wholly-owned group after roll-over) - the roll-over asset.

855-15 When an asset is taxable Australian property

There are 5 categories of *CGT assets that are taxable Australian property . They are set out in this table.

Note: An asset is also taxable Australian property if it was acquired by a company after 28 January 1988 and before 26 May 1988 from a foreign resident as a result of a disposal for which there was a roll-over under section 160ZZN or 160ZZO of the Income Tax Assessment Act 1936: see section 136-25 of the Income Tax (Transitional Provisions) Act 1997.

855-20 Taxable Australian real property

A *CGT asset is taxable Australian real property if it is:

(a) real property situated in Australia; or

(b) a *mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, *petroleum or quarry materials are situated in Australia.

855-25 Indirect Australian real property interests

(1) A *membership interest held by an entity (the holding entity ) in another entity (the test entity ) at a time is an indirect Australian real property interest at that time if:

(a) the interest passes the *non-portfolio interest test (see section 960-195):

(i) at that time; or

(ii) throughout a 12 month period that began no earlier than 24 months before that time and ended no later than that time; and

(b) the interest passes the principal asset test in section 855-30 at that time.

(2) For the purposes of subsection (1), in working out whether the interest passes the *non-portfolio interest test and the principal asset test in section 855-30:

(a) apply section 350 of the Income Tax Assessment Act 1936 as if the words ", or is entitled to acquire," (wherever occurring) were omitted; and

(b) apply section 351 of that Act as if:

(i) the words ", or that the beneficiary is entitled to acquire" (wherever occurring) were omitted; and

(ii) the words ", or that the entity is entitled to acquire" in paragraph 351(2)(d) were omitted.

(3) The first element of the *cost base and *reduced cost base of a *CGT asset on 10 May 2005 is the *market value of the asset on that day if, on that day:

(a) the CGT asset was a *membership interest you held in another entity; and

(b) you were a foreign resident, or the trustee of a trust that was not a *resident trust for CGT purposes; and

(c) the CGT asset was a *post-CGT asset; and

(d) the CGT asset did not have the necessary connection with Australia (within the meaning of this Act as in force on that day) disregarding the operation of paragraph (b) of item 5 and paragraph (b) of item 6 of the table in section 136-25 (as in force on that day).

(4) Also, Parts 3-1 and 3-3 apply to the asset as if you had *acquired it on that day.

855-30 Principal asset test

(1) The purpose of this section is to define when an entity's underlying value is principally derived from Australian real property (see paragraph 855-5(2)(b)).

(2) A *membership interest held by an entity (the holding entity ) in another entity (the test entity ) passes the principal asset test if the sum of the *market values of the test entity's assets that are *taxable Australian real property exceeds the sum of the *market values of its assets that are not taxable Australian real property.

(3) For the purposes of subsection (2), treat an asset of an entity (the first entity ) that is a *membership interest in another entity (the other entity ) as if it were instead the following 2 assets:

(a) an asset that is *taxable Australian real property (the TARP asset );

(b) an asset that is not taxable Australian real property (the non-TARP asset ).

(4) For the purposes of subsection (2), treat the *market value of the TARP asset and the non-TARP asset according to the following table.

Note: For the purposes of item 2 of the table, it is necessary to work out the market value of any TARP assets and non-TARP assets in relation to any membership interests held by the other entity before working out the value of the TARP asset and non-TARP asset held by the first entity.

(5) For the purposes of this section, disregard the *market value of any asset acquired by the test entity, or by any other entity, if the *acquisition was done for a purpose (other than an incidental purpose) that included ensuring that a *membership interest in any entity would not pass the principal asset test in this section.

855-35 Reducing a capital gain or loss from a business asset - Australian permanent establishments

(1) This section applies to a *CGT asset that is *taxable Australian property under item 3 of the table in section 855-15 because you have used it at any time in carrying on a *business through a permanent establishment (within the meaning of section 23AH of the Income Tax Assessment Act 1936) in Australia.

(2) The *capital gain or *capital loss you make from a *CGT event in relation to the asset is reduced if you used it in this way for only part of the period from when you *acquired it to when the CGT event happened.

(3) The gain or loss is reduced by this fraction:

Number of days the asset was not used in the way described in subsection (1) / Number of days in that period

855-40 Capital gains and losses of foreign residents through fixed trusts

(1) The purpose of this section is to provide comparable taxation treatment as between direct ownership, and indirect ownership through a *fixed trust, by foreign residents of *CGT assets that are not *taxable Australian property.

(2) A *capital gain you make in respect of your interest in a *fixed trust is disregarded if:

(a) you are a foreign resident when you make the gain; and

(b) the gain is attributable to a *CGT event happening to a *CGT asset of a trust (the CGT event trust ) that is:

(i) the fixed trust; or

(ii) another fixed trust in which that trust has an interest (directly, or indirectly through a *chain of fixed trusts); and

(c) either:

(i) the asset is not *taxable Australian property for the CGT event trust at the time of the CGT event; or

(ii) the asset is an interest in a fixed trust and the conditions in subsections (5), (6), (7) and (8) are satisfied.

Note: Section 115-215 treats a portion of a trust's capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.

(3) You are not liable to pay tax as a trustee of a *fixed trust in respect of an amount to the extent that:

(a) the amount gives rise to a *capital gain that is disregarded for a beneficiary under subsection (2); or

(b) the amount gives rise to a deduction for a beneficiary under subsection (9).

(4) To avoid doubt, subsection (3) does not affect the operation of subsection 98A(1) of the Income Tax Assessment Act 1936 (about taxing beneficiaries who are foreign residents at the end of an income year).

Conditions

(5) The conditions in subsections (6), (7) and (8) must be satisfied if the relevant *CGT event happens to an interest in a *fixed trust (the first trust ) and the interest is *taxable Australian property at the time of the CGT event.

(6) At least 90% (by *market value) of the *CGT assets of:

(a) the first trust; or

(b) a *fixed trust in which the first trust has an interest (directly, or indirectly through a *chain of fixed trusts);

must not be *taxable Australian property at the time of the relevant *CGT event.

(7) If the condition in subsection (6) is not satisfied for the first trust (but is satisfied for a trust covered by paragraph (6)(b)), the condition in subsection (8) must be satisfied for the first trust, and for each other trust in the *chain of trusts between the first trust and the trust that satisfied the condition in subsection (6).

(8) The condition is that, assuming any interest in a *fixed trust in that *chain not to be *taxable Australian property, at least 90% (by *market value) of the *CGT assets of the trust must not be taxable Australian property.

Foreign resident companies

(9) If a company's assessable income for an income year includes an amount under subsection 98A(1) of the Income Tax Assessment Act 1936 because it is a beneficiary described in subsection 98(3) of that Act, the company can deduct for the income year the amount of a *capital gain that would be disregarded for it under this section for that year had section 115-215 of this Act applied to it for that year.

Note 1: Section 98A of the Income Tax Assessment Act 1936 deals with taxing beneficiaries who are foreign residents at the end of an income year.

Note 2: Subsection 98(3) of that Act makes the trustee liable for tax on the share of the income of the trust to which a foreign resident company is presently entitled.

Note 3: Section 115-215 treats a portion of a trust's capital gain as a capital gain made by a beneficiary, and applies the CGT discount to that portion as if the gain were made directly by the beneficiary.

Subdivision 855-B - Becoming an Australian resident

Table of sections

855-45 Individual or company becomes an Australian resident

855-50 Trust becomes a resident trust

855-55 CFC becomes an Australian resident

855-45 Individual or company becomes an Australian resident

(1) If you become an Australian resident, there are rules relevant to each *CGT asset that you owned just before you became an Australian resident, except an asset:

(a) that is *taxable Australian property; or

(b) that you *acquired before 20 September 1985.

Note: This section has effect subject to section 768-950 (individuals who become Australian residents and are temporary residents immediately after they become Australian residents).

(2) The first element of the *cost base and *reduced cost base of the asset (at the time you become an Australian resident) is its *market value at that time.

(3) Also, Parts 3-1 and 3-3 apply to the asset as if you had *acquired it at the time you became an Australian resident.

(4) This section does not apply to a *share or right if:

(a) it is a *qualifying share or a *qualifying right; and

(b) you have not made an election under section 139E of the Income Tax Assessment Act 1936 covering the share or right; and

(c) the *cessation time for the share or right has not occurred.

855-50 Trust becomes a resident trust

(1) If a trust becomes a *resident trust for CGT purposes, there are rules relevant to each *CGT asset that the trustee owned just before the trust became a resident trust for CGT purposes, except one:

(a) that is *taxable Australian property; or

(b) that the trustee *acquired before 20 September 1985.

(2) The first element of the *cost base and *reduced cost base of the asset (at the time the trust becomes a *resident trust for CGT purposes) is its *market value at that time.

(3) Also, Parts 3-1 and 3-3 apply to the asset as if the trustee had *acquired it at the time the trust became a *resident trust for CGT purposes.

Exception

(4) This section does not apply to a trust if, just before it became a *resident trust for CGT purposes, it was a *CFT because of paragraph 342(a) of the Income Tax Assessment Act 1936.

Note: This section is disregarded in calculating the attributable income of a trust: see section 102AAZB of the Income Tax Assessment Act 1936.

855-55 CFC becomes an Australian resident

(1) This section applies to a *CFC that stops at a time (the residence change time ) being a resident of a *listed country or an *unlisted country and becomes an Australian resident.

(2) Section 855-45 does not apply to the *CFC.

(3) The modifications of Parts 3-1 and 3-3 of this Act in sections 411 to 414 of the Income Tax Assessment Act 1936 have the effect they would have, in relation to each *commencing day asset owned by the *CFC at the residence change time, if those modifications were used to work out the taxable income of the CFC rather than its *attributable income.

(4) However, if a *capital gain on a *commencing day asset of the *CFC (for a period before the residence change time) was subject to tax (within the meaning of Part X of the Income Tax Assessment Act 1936) in a *listed country, the modifications of Parts 3-1 and 3-3 of this Act in sections 411 to 414 of the Income Tax Assessment Act 1936 have the effect they would have in relation to the asset if:

(a) those modifications were used to work out the taxable income of the CFC rather than its *attributable income; and

(b) the *commencing day of the CFC were the residence change time.

Note: This section is disregarded in calculating the attributable income of a CFC: see section 410 of the Income Tax Assessment Act 1936.