CGT rules have devilish details

When it comes to tax legislation in general, and capital gains tax (CGT) legislation in particular, the saying the devil is in the detail applies. In a recent answer concerning the impact of CGT on non-resident taxpayers I got the answer wrong.

The question related to the impact of tax on non-residents that make a profit selling investments held in Australia. In the answer I advised CGT was payable on shares and units sold for a profit. This is the case if the shares are held in a private company or trust but it does not automatically apply to shares in public companies or listed trusts.

A non-resident taxpayer only pays CGT on shares in a public company if they hold more than 10 per cent of the total value of the company, or if real property makes up 50 per cent or more of the asset base of the company. Real property includes land, buildings and mining, quarrying or prospecting rights in Australia.

The 50 per cent real property test also applies to unit trusts. This would mean where a non-resident owns units in a listed property trust CGT would be payable on any profit made on the sale of the units.

The test that determines whether the asset base of a listed entity is 50 per cent or more is a prescriptive test and again the devil is in the detail. Non-resident taxpayers should therefore seek advice from a tax specialist when there is any doubt as to the makeup of the asset base of a company or listed unit trust they sell.

Unless an election is made by a taxpayer who becomes a non-resident, CGT is payable on the value of shares at the date they become a non-resident. This means even though they did not sell the shares they could pay CGT on becoming a non-resident. Once a person becomes an Australian tax resident again the value of their shares at that time becomes their new purchase cost.

In addition to getting the answer wrong about non-resident taxpayers I also got the sequence wrong when it comes to how a capital gain is taxed.

The sequence for calculating the assessable portion of a capital gain is as follows:

1. Profit or loss on sale is calculated by deducting all costs of asset sold from net sale proceeds.
2. Capital losses made on the sale of assets in the current year are deducted.
3. Capital losses carried from previous years are deducted.
4. If the asset was held for more than 12 months the gain is reduced by the general 50 per cent discount.
5. The resulting gain is then included as assessable income.

There are other discounts that apply if the person selling the asset is classed as a small business owner. Where losses have been made on other activities during the year the gain is made, such as a rental property loss, this loss and tax losses carried forward from previous years also reduce the amount of taxable capital gain.   

Q. I am an Australian-born non-resident who has been living in the Middle East for more than five years. If I were to buy and sell shares on the Australian Securities Exchange what is the tax rate I would pay on capital gains and dividends?

A. As a non-resident no CGT would be payable on gains unless 50 per cent or more of the company’s assets was made up of real property. Fully franked dividends paid to non-residents are not taxable in Australia.

Investment tax questions can be emailed to max@taxbiz.com.au