Individuals are generally entitled to a 50% discount on a capital gain where a CGT asset (such as a property) is disposed, provided that the asset is held for at least 12 months. However a recent change has altered the tax treatment for some taxpayers.
By way of background, foreign and temporary residents are required to pay CGT on “taxable Australian property” (TAP) only.
This term has a wide definition – including Australian land holdings held directly or indirectly (eg. via units in a unit trust), but certain other assets may also constitute TAP — consult this office for more examples.
The government has changed the rules so that restrictions to the 50% discount now apply to foreign and temporary resident individuals. The measure was originally announced in last year’s Federal Budget on May 8, 2012 and became law on June 29, 2013. It applies from the Budget announcement date.
What were the previous rules, and who is affected?
This discount was previously available to all individual taxpayers irrespective of residency status. Specifically, the change affects individuals (including a beneficiary of a trust and partner in a partnership) who are:
- a foreign or temporary resident (important: if you are unsure about your residency status, consult this office)
- an Australian resident with a period of foreign residency after May 8, 2012, and
- in receipt of a discount capital gain from a CGT event (eg. disposal of the asset) that occurred after May 8, 2012.
Bear in mind that you are not affected by this change and the full 50% CGT discount is available if:
- the CGT event occurred before May 9, 2012, and
- you have been an Australian resident at all times on or after May 8, 2012.
How do the changes affect foreign or temporary residents?
Temporary and foreign residents will still be entitled to a CGT discount on capital gains accrued before May 9, 2012 provided they choose to obtain a market valuation for their assets as of that date (ie. a “market value approach”).
This will apportion the CGT discount to take into account the capital gain that they have accrued before May 9, 2012.
Key differences are summarised in the table below.
|Old law||New law|
|The 50% discount applicable to a discount capital gain of an individual was available irrespective of the residency of the individual.||The 50% discount applicable to a discount capital gain of an individual will be reduced if:
• the CGT event from which the capital gain arises occurs after May 8, 2012, and
• the individual was a foreign or temporary resident at any time in the period after May 8, 2012 and the time of the CGT event.
Timing is critical
Where a CGT event (eg. disposal) does occur after May 8, 2012, access to the CGT 50% discount depends on:
- whether the asset was held on, or was acquired after, May 8, 2012
- if the asset was held on May 8, 2012, whether or not the individual was a resident on that date
- whether a choice is made by an individual who was a foreign or temporary resident on May 8, 2012 to use the market value approach to determine the part of the discount capital gain that accrued on and prior to that date, and
- the residency of the individual during the period the asset was held after May 8, 2012.
For assets acquired after May 8, 2012 by an individual who was a foreign or temporary resident for the entire period the asset was held, the discount percentage will be zero because such individuals are no longer eligible for the CGT discount.
How do the changes affect Australian residents?
You must calculate the CGT discount you can apply to the capital gain you have if you are an Australian resident and, after May 8, 2012, you have:
- a capital gain from a CGT event, and
- a period of foreign or temporary residency.
The period of foreign or temporary residency after May 8, 2012 is taken into account when calculating the CGT discount.
It is worth noting that where an Australian individual becomes a foreign resident, the amendments will only apply in circumstances where the assets involved are TAP (see above), including where the individual has chosen to disregard the CGT event triggered by their change in residency status (in tax talk, referred to as a CGT event I1).
The calculations under the new law are complex. Consult this office to determine your eligibility and to calculate the amount of any CGT discount available.