When it comes to managing taxes, things can get a bit tricky—especially when foreign assets are involved. At Abbotts Group, we often help our clients untangle the complexities of the Australian tax system, particularly when it intersects with foreign jurisdictions. Here’s a look at a recent scenario we handled that highlights some of the key issues you might face.

Selling shares in a foreign company: can you avoid Capital Gains Tax?

Imagine you’ve invested in a foreign company and are now looking to sell your shares. The big question is: Can you do this without paying Australian Capital Gains Tax (CGT)? The answer, potentially, is yes—thanks to some specific provisions in the Australian tax law. It should be noted that these provisions only apply where shares are owned by an Australian Resident company.

How it works:

Australian tax law includes a special rule under Subdivision 768-G of the ITAA 1997 that could allow you to reduce the CGT on the sale of foreign shares to zero. To potentially qualify for the CGT exemption, the following basic criteria must be met: 

1. Australian residency of the holding company: The holding company must be an Australian resident and must have realised a capital gain or loss from a CGT event involving shares in a foreign company.
2. Eligible CGT events: The CGT event must be one of the specified events under s 768-505(1)(c), including events such as CGT event A1 or B1.
3. Share eligibility: The shares cannot be classified as eligible finance shares or widely distributed finance shares.
4. Voting percentage: The holding company must have held at least a 10% direct voting interest in the foreign company for a continuous 12-month period starting no earlier than two years before the CGT event.

Provided the criteria are met, the applicable capital gain is reduced by a percentage that represents how much of the foreign company’s assets are ‘active’—meaning used in business operations. Here’s how it’s calculated

         Active Foreign Business Percentage  =  Active Foreign Business Assets / Total Assets

Active Foreign Business Assets include assets used in business operations but exclude cash and cash equivalents.

What happens next?

So, let’s say you manage to qualify for the CGT exemption—what’s next? The challenge then is how to withdraw the exempt amount from your Australian company. There are a couple of options here:

• Members Voluntary Liquidation: This option might allow the underlying shareholder to claim a 50% General CGT Discount—if they’re an Australian resident at the time.
• Unfranked Dividend: Paying this to the underlying shareholders could result in up to 47% tax if they’re Australian residents. It gets even more complicated if they’re foreign residents, as you’ll need to navigate any relevant tax treaties.

What about your main residence in Australia?

Another common issue arises when Australians consider moving overseas but still own property back home. If you rent out your Australian home while living abroad, you might assume you’re safe from extra taxes, but think again.

The catch:

If you sell your property while you’re a non-resident for Australian tax purposes, the property will be subject to Australian CGT without the ability to utilise the 50% general CGT discount. Plus, the 6-year rule—which usually allows you to rent out your home for up to six years without losing your Main Residence Exemption—won’t apply if you’re not an Australian resident when you sell.

Dealing with foreign tax issues is like walking through a maze—it’s easy to get lost. But with the right guidance, you can navigate these complexities and make the best decisions for your financial future. If you have any questions about how foreign tax rules might affect you, don’t hesitate to get in touch with us at Abbotts Group. We’re here to help simplify the process and ensure you’re on the right path.