Retrospective changes to foreign CGT regime 'neither fair nor equitable': Tax Institute

Draft legislation proposed by the government for strengthening the foreign resident capital gains tax (CGT) regime expands the definition of 'taxable Australian real property' beyond its established general law meaning and raises significant valuation and compliance risks, according to the Tax Institute.

Treasury released consultation on the reforms last month, which it said provides clarification that CGT applies to foreign investors selling assets with a close economic connection to Australian land and our natural resources.

In a joint submission with the Institute of Public Accountants, the Tax Institute raised major concerns about the retrospective application of the reforms, with the expanded definition of real property intended to apply retrospectively to 12 December 2006.

"We are particularly concerned that, despite a significant expansion in scope, the current proposal includes no transitional or grandfathering relief," the institute said.

"This represents a departure from established and accepted practice for reforms that bring new classes of assets within the tax net and materially exacerbate the adverse effects of retrospectivity."

The submission stated that applying the expanded definition of real property retrospectively to December 2006 was "neither fair nor equitable" particularly given the longstanding understanding of the law and the reliance placed on prior government announcement.

"The proposal represents a clear departure from earlier Federal Budget announcements and long-standing stakeholder expectations."

The Tax Institute said while the ATO has issued a statement indicating that it generally won't seek to apply the changes beyond a standard four-year review period, this does not provide investors with sufficient certainty.

"Administrative guidance cannot substitute for clear legislative settings, particularly where retrospective application is proposed, and an administrator cannot be expected not to apply a law change retrospectively in circumstances where the legislature has clearly and intentionally given the law change retrospective effect," it said.

"If the government intends to limit the practical application of retrospectivity, it should codify that limitation in the legislation itself, rather than relying on administrative assurances that may be withdrawn or qualified over time, or otherwise not applied."

The Tax Institute and the IPA are calling for the government to abandon the retrospective application of the reforms.

"If the amendments proceed, they should apply only prospectively from a clearly communicated commencement date," the submission said.

"Additionally, given that the rules result in a substantial broadening of the tax base, they should include either grandfathering rules or transitional rules which provide non-residents with a cost base in their investments affected by the broadening which is based on the market value of the assets at the time the changes take effect."