Over the past 12 months there have been a number of important changes to Australia’s Federal and State taxation laws that affect foreign investment into Australia.
A summary of these changes is outlined below.
Capital Gains Tax – Removal of 50% Discount and New Withholding Tax Regime
The changes seek to:
- remove the 50% CGT discount currently available to foreign resident individuals with effect from 8 May 2012
- introduce, from 1 July 2016, a new withholding tax in circumstances where a foreign resident sells Australian real property.
Prior to the removal of the 50% CGT discount, foreign resident individuals who held a CGT asset for greater than 12 months could reduce any capital gain made on the sale of that asset by 50%. As a transitional measure, a portion of the discount is still available for capital gains accrued up until 8 May 2012. Accordingly, foreign resident individuals still holding taxable assets acquired prior to the removal of the 50% CGT discount should obtain a market valuation of those assets as at 8 May 2012.
The new withholding tax (WHT) regime will require a purchaser of real property from a foreign resident to withhold and remit 10% of the proceeds from the sale to the Australian Taxation Office (ATO). The foreign resident will then receive a credit for that amount against its capital gains tax liability assessed upon lodgment of their Australian income tax return. The new withholding regime will not apply to the sale of residential property valued under $2.5 million.
Changes to Australia’s thin capitalisation rules commence from 1 July 2014.
Australia’s thin capitalisation rules operate to limit the amount of debt that can be used to fund a foreign resident’s Australian operations. If the maximum allowable debt is exceeded, a portion of interest deductions may be disallowed. Foreign residents investing into Australia rely primarily on the ‘safe harbour’ maximum allowable debt test, which effectively limits the Australian operations debt to equity ratio to 75%.
The thin capitalisation rules only apply if the amount of debt deductions exceed $250,000 in a given year. This is known as the de minimis threshold.
The proposed changes will:
- reduce the safe harbour maximum allowable debt to equity ratio down to 60%
- increase the de minimis threshold to $2,000,000.
Foreign residents with Australian operations should conduct a review of their thin capitalisation position and consider re-financing if necessary to avoid having interest deductions disallowed as a result of the changes.
Australia has introduced a new set of transfer pricing rules for international business transactions.
The newly introduced rules are intended to expand the transfer pricing regime to focus on arm’s length behaviour and conditions, thereby allowing the ATO to consider broader concepts in an arm’s length analysis, including an entity’s profitability, gross margin and prices.
The new transfer pricing regime also provides the ATO with greater powers to reconstruct transactions and impose stricter record keeping requirements.
General anti-avoidance changes (Part IVA)
Australia’s general anti-avoidance rules are designed to prevent entities entering into schemes to avoid Australian income tax. The rules are intended to apply where an entity enters into a scheme for the sole or dominant purpose of obtaining a tax benefit.
Having lost a number of high profile court cases, the Australian Government has passed legislation to amend the anti-avoidance rules.
The ATO was of the view that the existing anti-avoidance rules were not operating effectively and were not preventing schemes that, in the ATO’s view, were entered into to avoid Australian income taxes.
Foreign residents should seek advice on the impact of these changes prior to implementing any restructure of Australian investments, as the anti-avoidance regime may now have a broader application.
Stamp duty: land rich entities
The Victorian State Government introduced new landholder rules applying from 1 July 2012. The landholder rules broadly operate to impose stamp duty on significant acquisitions in a company (at least 50% of the shares) or unit trust (at least 20% of the units) that owns greater than $1,000,000 worth of land in Victoria. If the rules apply, stamp duty is imposed at approximately 5.5% of the value of Victorian land held by the relevant entity multiplied by the percentage interest acquired.
The landholder rules are a significant change from the previous land rich regime which only operated to impose duty where the relevant entity held greater than $1,000,000 worth of land and at least 60% of the value of its assets were land.
The landholder regime is now in place in every State and Territory in Australia except Tasmania, which still operates under a land rich model.
Foreign residents should be mindful of Australia’s landholder regimes, especially when acquiring interests in either a company or trust that owns land in Australia.