The Federal Budget handed down in May continues to give taxpayers unwanted surprises following the enactment of the CGT provisions in late June.  Whilst the removal of the CGT discount and shift to indexation was clearly announced, the technicalities of how this was to be achieved has only become clear on the passing of the legislation.  As ever, the devil is in the detail…

Under the existing rules (which apply to 30 June 2027) where a taxpayer disposes of an asset held for more than 12 months they are entitled to the 50% CGT discount.  This position is adjusted where the taxpayer has been a non resident for part of the ownership period.  For example, if an individual held an asset for 10 years and was a resident for 8 years, in simple terms they would get the 80% (8/10) of the 50% CGT discount when the asset was sold.

The Federal Budget announcements and sound bites made it clear that assets held on 30 June 2027 were deemed to be sold and reacquired at market value to lock in the amount of the gain that is eligible for the CGT discount.  This deemed cost base provided the basis on which indexation was to apply, however, the legislation giving effect to this differs in that it is not an automatic disposal process, rather certain criteria need to be satisfied.

Whilst a number of the criteria are relatively straight forward, for a large group of taxpayers, past (or current) events may mean that it is impossible to satisfy the requirements.  Where taxpayers have been a non resident for a period of time during the assets ownership (eg think of a portfolio of shares or an investment property held during a period of secondment for work overseas), then based on the current legislation they would not appear to meet the criteria for a deemed disposal and reacquisition.

The impact of not meeting the deemed disposal criteria would, at this stage appear to be three fold:

• taxpayers are not eligible for indexation on the deemed cost base;
• the realisation event (when the asset is sold after 1 July 2027) may appears still to be a discount capital gain albeit subject to restrictions;
• the gain would be subject to the minimum 30% tax.

The requirement for residency is more complex when trusts are involved.  The ability for Australian resident trusts to access the deemed disposal and indexation is based on the residency of beneficiaries at the time of the actual disposal.

Taxpayers who have had a period of non residency or are thinking of going overseas whilst holding assets (or are potential beneficiaries of Australian trusts) will need to consider their position carefully prior to 30 June 2027.  The changes will also impact individuals decision on paying tax on cessation of residency or deciding to defer and potentially forfeiting indexation.

Depending on the assets held, restructuring to retain the assets may be possible, noting the proposed changes to trust taxation, however, this would need to be weighed up against actual tax liabilities and potential stamp duty implications.

Should you have any questions about how these changes will impact you please reach out to your Engagement Partner.