Background on Foreign-Resident CGT Changes
In the 2024-25 Federal Budget, the Australian Government introduced reforms to strengthen the CGT regime for foreign residents, including:
- Expanding CGT obligations to include assets with a “close economic connection” to Australian land. (dlapiper.com)
- Changing the principal asset test from a point-in-time test to a 365-day testing period. (dlapiper.com)
- Requiring notification to the ATO when foreign residents dispose of membership interests or shares exceeding AUD 20 million in value. (dlapiper.com) However, the effective date has been deferred from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after Royal Assent of the Act. (taxnews.ey.com)
Practical Tax Planning Strategies
Timing matters:
- If you’re a foreign resident planning to dispose of well-connected assets or shares over AUD 20 million, consider doing so before the deferred application date, if feasible. This may enable avoidance of notifications or expanded CGT exposure under the new rules.
- Be cautious with contracts negotiated prior to the law’s effective date, but with settlement later—these may still fall under the new rules, depending on when the CGT event is deemed to occur.
Structuring ownership:
- Use widely-held foreign funds rather than single-investor trusts or single shareholders where possible. Proposed changes may scrutinize “captive MITs” (Managed Investment Trusts) that are ultimately controlled by a single foreign owner. (dlapiper.com)
- Consider Australian entities or partnerships with local beneficiaries or mixed ownership to dilute foreign resident exposure.
Notification and compliance readiness:
- Prepare internal systems to track transactions exceeding AUD 20 million that could trigger notification rules.
- Keep detailed records to evidence the nature of assets and their connection to Australian land, duration of ownership, and principal asset status under the 365-day test.
Example Scenario
Investor X, a foreign resident, owns shares in an Australian company and plans to dispose of them. The shares are valued at AUD 25 million.
Before the change:
- No requirement to notify ATO for this disposal, unless related to Australian real property directly.
- Principal asset test may be point-in-time: if the shares are not classified as “real property interests”, perhaps no CGT exposure beyond current rules.
Under proposed new law (after act receives Royal Assent and after deferred effective date):
- Shares may be treated as having a close economic connection to Australian land, triggering broader CGT liability.
- Must notify ATO prior to transaction due to high value.
- The 365-day holding test must be satisfied to avoid harsher asset tests.
Key Takeaways
- The deferral buys time to plan, structure and time asset sales carefully.
- Foreign residents should assess whether ownership structures are exposed under the new regime.
- Engage specialist tax advice and ensure record keeping is robust ahead of the transition.