Australian capital gains and foreign residents

Broadly speaking, foreign residents are only subject to capital gains tax (‘CGT’) on “taxable Australian property” (‘TAP’). There are five categories of assets that are TAP:

1. directly held taxable Australian real property. The following are taxable Australian real property:
2. real property situated in Australia; and
3. mining, quarrying or prospecting rights where mineral, petroleum or quarry materials are situated in Australia;
4. indirectly held taxable Australian real property interests;
5. business assets used in an Australian permanent establishment of a foreign resident;
6. options or rights over category 1-3 assets; and
7. assets where a CGT gain or loss is deferred when an entity ceases to be an Australian resident.

This article is going to focus on category 2 – indirect Australian real property interests.

For an interest to be an indirect Australian real property interest, it must meet the following two tests:

1. non-portfolio interest test. Generally, the interest in an entity (whether foreign or Australian) must be at least 10%; and
2. principal asset test. Generally, the market value of the entity’s assets is principally attributable to Australian real property.

The following example illustrates how a foreign resident’s shares in a foreign company could be TAP.

To work out whether Foreign Co disposal of its interest in Foreign Sub is an indirect Australian real property interest, we compare the market value of Foreign Sub’s TAP and other assets.

Foreign Sub’s interest in Aus Sub is treated as two assets, TAP and non TAP.

Step One:

The value of Foreign Sub’s TAP is the products of:
the market value of Aus Sub’s assets that are Australian real property i.e. the mining rights of AUD 5m; and
the direct participation interest held by Foreign Sub i.e. 100%.

Therefore Foreign Sub’s TAP is AUD 5m (AUD 5m multiplied by 100%).

Step Two:

The value of Foreign Sub’s non TAP is the products of:
the market value of Aus Sub’s assets that are not Australian real property i.e. the non-Aus ferry of AUD 1m; and
the direct participation interest held by Foreign Sub i.e. 100%.

Therefore Foreign Sub’s non TAP is AUD 1m (AUD 1m multiplied by 100%).

As the value of Foreign Sub’s TAP (AUD 5m) exceeds the value of its assets which are non TAP (AUD 1m), the interest held by Foreign Co in Foreign Sub would be TAP and any disposal by Foreign Co of its interest in Foreign Sub would be fully subject to Australian CGT.

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter.  You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances.  The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.