TAX WARNING – CGT may apply to sale of overseas property if foreign resident chose to defer gain when leaving Australia
An individual who ceases to be an Australian resident (and becomes a foreign resident) triggers CGT event I1, and is required to account for capital gains and losses on any asset of theirs that is not taxable Australian property (e.g., an overseas property). Refer to S.104-160.
However, the individual may make a choice to disregard capital gains and capital losses made from all CGT assets covered by CGT event I1. Refer to S.104-165. Importantly, this choice is effectively a deferral, as the CGT assets are then taken to be taxable Australian property and subject to CGT if they are later sold (when the individual is a foreign resident).
While CGT consequences arise for a foreign resident upon the sale of TARP (being taxable Australian property), CGT generally does not apply when a foreign resident sells real property located overseas (as this is not taxable Australian property).
A major issue faced by the ATO has been their difficulty in undertaking compliance action in respect of foreign residents that do not report their CGT obligations (relating to taxable Australian property), given that they are based overseas.
To assist in the collection of tax from foreign residents, the foreign resident CGT withholding rules were introduced in Subdivision 14-D of Schedule 1. These rules apply to the acquisition of TARP (and certain other taxable Australian property) under contracts entered into on or after 1 July 2016, and broadly impose an obligation for buyers to withhold 12.5% of the purchase price (to be paid to the ATO).
Note that the 12.5% withholding rate may be varied under S.14-235 of Schedule 1 (as discussed on page 105), and only applies to contracts entered into from 1 July 2017. For contracts entered into between 1 July 2016 and 30 June 2017, a withholding rate of 10% applies instead.