Selling a small business operated through a company: Sell the shares or sell the assets?
A person who is not a resident of Australia for tax purposes is nevertheless liable for capital gains tax (CGT) on certain assets located in Australia. And these assets are assets which have a “fundamental” connection with Australia – and are broadly as follows:
- real property (ie, land) located in Australia – including leases over such land;
- certain interests in Australian “land rich” companies or unit trusts;
- business assets used in carrying on a business in Australia through a “permanent establishment”; and
- options or rights over such property.
This means that such assets will be subject to CGT in Australia regardless of the owner’s tax residency status.
Importantly, in relation to real property, this also includes a home that the foreign resident may have owned in Australia. And this home will not be entitled to the CGT exemption for a home if the owner is a foreign resident when they sell or otherwise dispose of it.
Furthermore, a purchaser of property from a foreign resident will be subject to a “withholding tax” requirement, whereby they have to remit a certain percentage of the purchase price to the ATO as an “advance payment” in respect of the foreign resident’s CGT liability. However, this requirement is subject to certain thresholds and variations.
Importantly, a foreign resident will generally not be entitled to the 50% CGT discount on any capital gain that is liable to CGT in Australia – subject to an adjustment for any periods when they owned the asset when they were a resident of Australia.
In relation to a foreign resident’s liability for CGT on certain interests in Australian “land rich” companies or unit trusts, this rule broadly requires the foreign resident to:
- own at least 10% of the interest in the company or trust at the time of selling the interest (or at any time in the prior two years); and
- at the time of sale, more than 50% of the assets of the company or trust (by market value) are attributable to land in Australia.
This means that interest owned by foreign residents in private companies and unit trusts can potentially be caught by these rules.
Moreover, the application of these rules can be very difficult, particularly as a foreign resident can be caught by them at certain times and not others.
It is also worth noting that if someone ceases to be an Australia resident and becomes a foreign resident for tax purposes, then they will generally be deemed to have sold such interests at that time and be liable for CGT on them. However, this is subject to the right to opt out of this deemed sale rule – but this “opt-out” has other important CGT consequences.
On the other hand, the rule that applies to make a deceased person liable for CGT in their final tax return for assets that are bequeathed to a foreign resident beneficiary does not apply to certain assets – and these assets are any of the above assets with a “fundamental” connection with Australia.
And this may be further complicated by the fact that, for example, at the time of making the will, the beneficiary may not have been a foreign resident.
The application of Australia’s CGT rules to foreign residents can be very complex – especially given the “variable” nature of some of the rules. Therefore, it is vital to speak to us if you have a “foreign residency” issue.
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