The impacts of CGT changes on foreign investment in Australia

Treasury’s foreign resident CGT legislation aims to strengthen the CGT regime and provide certainty for investors; however, Holding Redlich partner Dhanushka Jayawardena has told Accountants Daily that the proposed changes risk making Australia less attractive for foreign investors.

Treasury proposed a retrospective application of its broadened definition of real property backdated to 12 December 2006.

“Some foreign resident taxpayers will be exposed to Australian tax on past disposals who may have been previously advised that they were not taxable on their exits,” Jayawardena said.

“The problem with this retrospectivity is that it does increase Australia's sovereign risk … [as it] was seen as one of those favourable destinations because of its historically stable and policy-aligned markets.

“These changes, particularly those that have retrospective application, really undermine that perception [of Australia, which] was historically regarded as a very stable and established legal and political landscape.”

Jayawardena told the masthead that since most foreign investors invest through a corporate structure, there is a strong incentive for them to route their investments through managed investment trust (MIT) eligible structures, predicting that there will be a stronger preference for MITs, which are designed for passive capital, and to access the 50 per cent discount on CGT.

CPA Australia echoed concerns about the CGT changes, saying that the retrospective tax reform undermines tax certainty for transactions dating back nearly 20 years.

Both CPA tax lead Jenny Wong and Jayawardena said that the two-week consultation period on the exposure draft was insufficient for the magnitude of the proposed changes.

In addition, the 365-day asset testing period could lead to compliance costs that exceed the associated risks, The Tax Institute told Accountants Daily previously.

Jayawardena warned that the current proposed framework assumes that there will be no valuation changes either before or after the 365-day mark, adding that this will require foreign investors to monitor and document their exposure to CGT in the lead-up to the 365-day deadline.

“The changes are … there to stop investors selling down their interests in a way that means that subsequent disposals are not caught by CGT, but [the changes] add a significant level of complexity and monitoring burden for foreign investors.”