Federal Budget | Global tax

Key takeaways

Foreign resident capital gains tax regime to be tightened from 1 July 2025.
New penalties will apply from 1 July 2026 to the underpayment of royalty withholding tax for large global groups where royalty payments have been mischaracterised or undervalued.

The Government has continued its focus on the taxation of multinationals over the past twelve months through changes to the thin capitalisation rules and progressing consultation on the implementation of the Organisation of Economic Cooperation and Development’s (OECD’s) Pillar Two Global and Domestic Minimum Taxes. Further global tax changes have been announced in the 2024-25 Budget, with a focus on royalties and the taxation of intangible assets for large multinationals and tightening of the foreign resident capital gains tax withholding regime.

Tightening of the foreign resident capital gains tax regime

The Government has announced that the foreign resident capital gains tax (CGT) regime will be amended to:

clarify and broaden the types of assets on which foreign residents are subject to CGT
amend the point-in-time principal asset test to a 365-day testing period, and
require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the Australian Taxation Office (ATO) prior to the transaction being executed.

The current foreign resident CGT regime broadly seeks to tax foreign residents on three types of assets - taxable Australian real property, indirect Australian real property interests (i.e. shares and other membership interests in entities that predominantly hold Australian real property) and assets used in an Australian permanent establishment.

What is or is not taxable Australian real property has been subject to debate since these rules were introduced in 2006. Whilst it is clear that a direct disposal of traditional Australian real estate should be subject to CGT, the ambiguity historically related to non-traditional real estate and infrastructure assets. In addition, the valuation of the different types of assets that may make up these types of investments (for example, fixtures or chattels) has also proven to be an area of debate between taxpayers and the ATO. The announcement to broaden the types of assets held by foreign residents subject to Australian CGT to include those “with a close economic connection to Australian land” is clearly aimed at removing an ambiguity of the types of assets captured or debate around valuations. We expect the measure is aimed at capturing assets such as water rights, pastoral leases and potentially mobile towers and renewable energy assets.

With respect to indirect Australian real property interests, the current provisions seek to determine whether the entity predominantly holds Australia real property at the time of disposal. The proposed amendments will replace this with a 365-day test period, presumably as an additional anti-avoidance measure.

We understand that the new ATO notification process highlighted in the Budget will impact disposals of membership interests exceeding $20 million in value by foreign residents where the foreign resident vendor is declaring and self-assessing that the membership interest is not an “indirect Australian real property interest”. Whilst there is no mention of a time frame for this notification, the ATO will require sufficient time to review and approve the tax outcomes on a proposed sale, and hence this will need to be factored into deal timelines.

The amendments are proposed to apply to CGT events commencing on or after 1 July 2025. There does not appear to be any grandfathering for existing assets which will likely mean that assets previously not subject to CGT may now be brought into the Australian tax net. The Government has indicated that it intends to consult on the implementation of this measure later this year.

These measures are in addition to those announced in the 2023-24 Mid-Year Economic and Fiscal Outlook. Those amendments, which will apply from 1 January 2025, will increase the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reduce the withholding threshold from $750,000 to $0.

Royalties and the taxation of intangible assets

The Government has confirmed in this year’s Budget that the previously announced intangibles integrity measure will no longer be proceeding as it considers that this integrity measure will now be addressed through the Pillar Two Global Minimum Tax and Domestic Minimum Tax that is being implemented.

This proposed measure, originally announced as part of the 2022-23 Budget, was intended to deny deductions for payments made by Significant Global Entities (SGEs) relating to intangible assets connected with low corporate tax jurisdictions. Whilst Treasury released updated exposure draft law and explanatory materials on 23 June 2023 to significantly amend the scope of the proposal (as discussed in this Tax Alert), it has now been abandoned entirely.

The taxation of intangible assets has continued to be a focus area for both the Government and the ATO.

However, the Government has announced that new penalties will be introduced to apply to entities who are part of a group with more than $1 billion in global turnover annually that are found to have mischaracterised or undervalued royalty payments, to which royalty withholding tax would otherwise apply. This measure will apply from 1 July 2026.

The taxation of intangible assets has continued to be a focus area for both the Government and the ATO, including through the recently updated draft software tax ruling and the Practical Compliance Guideline on migration of intangible assets. The ATO has previously expressed concerns with international arrangements that mischaracterise intangible assets, as outlined in Taxpayer Alert TA 2018/2.

No changes to corporate residency

As part of the 2020-21 Federal Budget, the former Government announced it would legislate a change in line with the Board of Taxation’s key recommendation in its 2020 report, Review of Corporate Tax Residency, to ensure that a company that is incorporated offshore will be treated as an Australian tax resident if it has a ‘significant economic connection to Australia’.

There was no comment in this Budget as to the future of this previous Budget announcement. Accordingly, foreign incorporated companies will need to continue to apply the existing rules, including where disclosure is required under the new ‘consolidated entity disclosure statement’ (see further below).

The Government’s multinational tax agenda to date

In addition to the new measures outlined above, it is also worth reflecting on the Government’s progress on its pre-election promises to make changes to multinational taxation.

To date, the following measures have been enacted:

the new thin capitalisation rules comprising the new fixed ratio test, the group ratio test and the third party debt test, which will apply to most multinational taxpayers with effect for income years commencing on or after 1 July 2023 (see this Tax Alert for further details)
new debt deduction creation rules which will disallow debt deductions to the extent that they are incurred in relation to certain debt creation schemes and apply to many multinational taxpayers with effect for income years commencing on or after 1 July 2024 (see this Tax Alert for further details), and
mandatory disclosure of information (including place of incorporation and tax residency) of subsidiaries in the financial reports of Australian public companies by way of a ‘consolidated entity disclosure statement’, applicable to financial years commencing on or after 1 July 2023.

And in the context of other multinational reforms, work is expected to continue to implement the following measures:

the OECD’s Pillar Two framework to implement a Global and Domestic Minimum Tax in Australia, with an effective date as early as fiscal years commencing on or after 1 January 2024 (see this Tax Alert for further details), and
the requirement for large multinationals to publicly disclose certain tax information on a country-by-country (CBC) basis and a statement on their approach to taxation proposed to now apply to income years commencing on or after 1 July 2024 (see this Tax Alert for further details).

For more information on these measures and to keep up to date with future changes, please refer to our Doing business in Australia website.