Tax Tip 387: Sale of Australian shares: Capital Gains for Foreign Residents

A foreign resident (for tax purposes) might be able to disregard a capital gain (or a capital loss) on assets held in Australia if they are not taxable Australian Property.


Example

Bart is an Australian Citizen living overseas and is a non-resident for tax purposes. He doesn’t like to invest elsewhere so invests in Australian shares.

Bart invests in a company which takes off and he has a $1mil capital gain. He sells the shares and makes $1mil profit which is not taxed in Australia – it could be taxed in the country he is residing in though.


Example 2

Bart invests in shares in a private company that his uncle sets up to own property. After a while Bart wants out and his uncle offers to buy Bart’s shares.

This will trigger CGT because the shares are TAP – Taxable Australian Property. This is because the company owns land so the s855-10 ITAA97 exemption does not apply.


Section 855-10 ITAA97

INCOME TAX ASSESSMENT ACT 1997 - SECT 855.10 Disregarding a capital gain or loss from CGT events

 

Taxpayer Warning !!!

A disc (or non fixed) trust cannot follow this view and distribute CGT free to non-resident beneficiaries that way.

eg Marge and Homer are beneficiaries of the Terry Waugh Disc trust. The trust holds CBA and ANZ shares which are not taxable australian property and these shares are sold for a sizeable gain. The trustee is Numpty Pty Ltd and its Director is Milhouse who lives in Sydney. Milhouse thinks that the gain is exempt due to s855-10 ITAA97 if distributed to his old mate and bro in law Bart in the USA. If you read it that how it looks...Right ?...WRONG. He even had Mr Dip Stick his tax adviser tell him this in tax free. What Dip Stick didnt know is the ATO have been aggressive in their view for a while and in 2021 they had a case win in the Greensill and the Martin decisions before the Federal Court.

The ATO view is not without some dispute. However their views in TD 2019/D6 and D7 are binding on taxpayers. The Federal Court in Greensill and Martin Holdings cases agreed with the ato. It remains to be seen if a successful appeal before the Full Federal Court has success. Or the High Court.

Complicated reason is as follows.
Technically a trustee is assessed under s98(3) on non-resident CGT amounts. The beneficiary is ALSO assessed under s115-215. However double taxation laws (s98A ITAA36) removes double taxation IF tax has been paid but since no tax was paid on that same income this acts to leave the beneficiary liable for tax on the CGT amount where the trustee may not be.

The ATO and Federal Court reasoning is that the CGT amount is not "from a CGT event" which is what s855-10 requires. Its from operation of the above tax law issue. It arises under statute, not a CGT event. So no exeption for Bart. And potentially double taxation in the USA.

 

TAP can also be indirect. Example : Units in a property trust or the example of shares in a company that is owns land. ETFs in a Australian property ETF. eg VAP.
Non-residnets can also RARELY be subject to tax on non-TAP. This is often called the Murdoch rule and old Rupert tried to game the ATO and Govt long ago when he fled to the USA. News Corp shares !!!

The Govt said. No wont happen - You are a billionaire trying to use tax law to the expense of aussie taxpayers by going to the USA before you sold up and introduced a 10% equity rule. If a non-resident owns more than 10% of a listed company or public trust it CAN be taxed as TAP.

I commonly see non-residents who report CGT on sahres. This isnt always wrong. A former resident may be using a election for shares that were held when they were a resident. But I also see tax agent mistakes where they automatically include CGT on share sales. If the shares were acquired after ceasing residency then no CGT applies.