Taxable Australian Property: A New Definition for Retroactive Taxation
Who doesn’t love a retroactive tax?
In the May 2024 budget, the Australian Government proposed an overhaul of its Capital Gains Tax (CGT) regime to prevent specific tax avoidance schemes. Historically, foreign tax residents have only been subject to tax on the disposal of Taxable Australian Property, namely ownership in Australian real property or land-rich entities.
The original proposal aimed to:
Extend the land-rich test: Move from a "point-in-time" test at disposal to a 365-day look-back period, thereby dissuading pre-emptive land disposals by companies before the disposal of their shares by foreigners.
Mandate notifications: Require reporting for high-value sales to ensure the Australian Taxation Office (ATO) is alerted to significant transactions.
Expand the definition: Capture existing loopholes, such as options held on land.
However, the newly released draft from Treasury delivers these changes with a few significant twists:
Expanded Scope: The definition now includes any item fixed or installed on land for the majority of its useful life. This could potentially capture leasehold improvements.
Retroactive Application: The legislation would be retroactive to December 2006, with no grandfathering for earlier purchases. This means any disposal since that date could trigger tax payable. Since foreign residents rarely lodge Australian returns, they may not be protected by standard amendment period sunsets.
Treaty Overrides: The legislation proposes to contravene existing Double Tax Treaties that would otherwise protect taxpayers. This trend follows the recent precedent set by state-driven foreigner surcharges on land tax and transfer duty.
In effect, Australia is following a global trend of eroding international agreements (effectively undoing years of cross-border negotiations with allies) to avoid passing unpopular local taxation reforms.
In short, any foreign tax resident who has sold shares in a company since December 2006 could be at risk of unexpected Australian tax liabilities. That represents 20 years of rewritten rules for former investors who are unlikely to be monitoring current Australian policy.
While none of this is law yet, the 14-day consultation period leaves very little time to voice concerns.
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