DO YOU OWN PROPERTY IN AUSTRALIA?
In our May and November 2017 newsletters we discussed the proposed removal of the Capital Gains Tax (CGT) main residence exemption for foreign residents. The proposed measures are contained in Treasury Laws Amendment (Reducing Pressure on Housing Affordability Measures (No2)) Bill 2018, which is yet to be passed by the Senate.
The Senate Economics Legislation Committee published its report on 23 March 2018, in which it recommended:
- “that the Australian Government ensures that Australians living and working overseas are aware of the changes to the CGT main residence exemption for foreign residents, and the transitional arrangements, so they are able to plan accordingly.”
- The bill be passed.
This article in the Australian Financial Review goes into some detail on the potential impact of the changes.
The transitional period ends on 30 June 2019, so if you are foreign resident and own a property in Australia that was your main residence before you departed the country, you should seek advice urgently so that you can make an informed decision on the appropriate action you should take in relation to your property.
IS YOUR COMPANY RESIDENT IN AUSTRALIA?
A company is tax resident in Australia if:
- It is incorporated in Australia, or
- It carries on business in Australia and has either its central management and control (CMC) in Australia, or its voting power controlled by shareholders who are residents of Australia.
There have been many cases in relation to the location of CMC of a company. Most recently, in Bywater Investments Ltd & Ors v FC of T 2016 ATC 20-589 the Full High Court determined that, where a company’s directors merely rubberstamp decisions made by others, they do not exercise central management and control, rather it is those who actually make the decisions.
Following the decision in Bywater, the ATO issued a Decision Impact Statement.
On 21 June 2018, TR 2018/5 Income Tax: central management and control test of residency was released, and applies with effect from 15 March 2017. The ruling sets out the ATO’s views on four matters relevant to determining a foreign company’s residency status under the CMC test:
- When a company carries on a business in Australia
- The meaning of CMC
- Determining who exercises CMC
- Ascertaining where CMC is exercised.
In relation to point 3, the ATO view is that while CMC is normally exercised by directors, it can’t be solely determined by identifying who has the legal power or authority to control and direct a company. The ruling discusses the circumstances where a company outsider without legal power or authority may exercise CMC (refer to paragraphs 19 to 29 of TR 2018/5).
CHANGES IN TAX RESIDENCY RULES FOR INDIVIDUALS
The Board of Taxation has conducted a review of the tax residency rules for individuals, and provided its initial report to the Minister for Revenue and Financial Services on 9 July 2018.
Australia’s tax residency rules have not changed significantly since their enactment in the 1930’s, and the Board was concerned that they may not be sufficiently robust to meet the requirements of the modern workforce.
The Board’s core finding is that the current rules are no longer appropriate, and require modernisation and simplification. They also identified a number of associated concerns. For example, where high wealth individuals manipulate the residency rules to become “residents of nowhere”, resulting in the avoidance of tax in Australia.
The board recommends replacing the current rules with an improved and simplified residency test as follows:
- A primary “days count” bright line test that automatically determines the residency status of most individuals; and
- A secondary test taking into account individual circumstances, which leverages some existing case law, as well as international practices.
The Government has not taken a position on the recommendations, but has supported the Board in undertaking further consultation.
IMPLEMENTATION OF THE OECD HYBRID MISMATCH RULES
Legislation containing the hybrid mismatch rules were introduced into Parliament on 24 May 2018. The new rules aim to prevent multinational companies from gaining an unfair competitive advantage by avoiding income tax or obtaining double tax benefits through hybrid mismatch arrangements which exploit differences in tax treatment under the laws of two or more tax jurisdictions.
The rules can apply to payments between related parties, members of a controlled group, or between parties under a structured arrangement. There is no de minimis or materiality threshold.
The rules will apply to payments with the following outcomes:
- a payment is deductible in one jurisdiction, and non-assessable in the other jurisdiction.
- a payment qualifies for a tax deduction in two jurisdictions
- where receipts are sheltered from tax by hybrid outcomes elsewhere in a group of entities or a chain of transactions.
The ATO have released Practical Compliance Guideline PCG 2018/D4 to help taxpayers manage their compliance risks in relation to hybrid mismatches.