CGT and leaving Australia

Question

I am sole owner of a trading Pty Ltd company and the sole trustee of a discretionary trust that owns eight investment properties.
I have been a tax resident for 12 years but now wish to return to my home country.
My trading company is over-capitalised and I would probably not be able to sell it for a profit and would make a capital loss on sale of about $100k on the cost base of $300k.
The investment properties would make a capital gain of about $500k on sale.
I want to sell both entities to a foreign-owned offshore company.
My questions are these:
1) From a CGT point of view,should I sell out before I become a non-resident or should I wait until after I leave Australia?
2) Is it important that I sell the trading company first and establish the capital loss before selling the properties so that the loss can be offset against the gain?
3)Would it matter if I was the sole owner of the offshore company?

Answer

Assumption – all these assets have been acquired after 19th Sept, 1985. The market value of the properties has not increased beyond the costs you will incur to sell them, since May 2012 when the 50% CGT discount was removed for non residents.
It is unusual for the purchaser of a business to actually buy the company that owns the business, because that would mean they take on all liabilities or omissions etc previous to the change of ownership. So if you sold it to a third party it is probably that it would be the company that sells the business and the loss will be locked into the company rather than be available for you to personally offset against other capital gains.
As for selling the company to a foreign-owned offshore company, if you control this then it may be possible to sell your shares and create the capital loss in your personal name. Nevertheless, if the business is operated in Australia then it will continue to be taxed in Australia. This question is impossible to answer without lots more detail about your circumstances, the company’s balance sheet and to know what the company is actually doing, besides this style of question is too detailed for this service. Though there are some things I would like you to consider.
Regarding the shares you own in the company. When you become a non resident of Australia ITAA97 section 104-160 deems a capital gains tax event to have occurred to any assets you have that are not “connected with” Australia. The shares in the company will be considered to still be connected with Australia if it is a private company that is resident of Australia when it is sold (ie management and control is in Australia). What will probably happen (depends on the nature of the company) is once you leave Australia the company will no longer be considered connected with Australia so a CGT event will be deemed to have happened to your share holding, at market value. This may well trigger the capital loss that you need, in your own name without having to actually transfer it to a foreign entity. You will needs specialist advice.
Section 104-165(2) does give you the option of ignoring the capital gain accrued on assets “not connected” with Australia, when you leave the country but this will effectively mean you are taxed on any gain while you are a non resident and not give you the capital loss that you may want to offset the gains. I give you this information anyway because after we discuss the discretionary trust issues you may not choose to create this capital loss for the company. The options offered by Section 104-165(2) are:
a) Defer the CGT and pay it when the asset is sold but the tax will be on the gain over the whole period up to the sale including when a non resident.
or
b) Defer the CGT on the basis you will be returning to Australian Residency before you sell it but when you do sell there will be no exemption for the gain made while you were a non resident.

re question 1) no difference as you will probably (depends on the nature of operations) be deemed to have disposed of the company’s shares when you and it leave Australia, for market value.
2) Yes sell first (probably just leave the country first) or at least in the same financial year as you sell enough properties to offset the loss.

Now to the discretionary trust. You can’t really sell a discretionary trust because you do not own it. Such is the very nature of a discretionary trust no one actually owns it the beneficiaries simply have a right to be considered in the profit distribution, not necessarily to receive the profit. Changing the beneficiaries to try to effectively sell the trust will trigger a CGT event on the assets held in the trust anyway. The trustee does make the decisions for the trust but has a fiduciary duty to the beneficiaries and the appointer has the right to remove the trustee so really is the one in control. Assets can be transferred out of the discretionary trust to the beneficiaries (or sold direct to other parties) and this will trigger CGT within the trust. Nevertheless, you may achieve what you want ie it to become a foreign entity if its control and management move offshore. But! Australia is never going to lose the right to tax the income from the houses and the capital gain because it will come from Australian Real Property ie connected with Australia, so Australia has a right to tax it no matter where the owners live. This then brings into question what you want to achieve by transferring the ownership of the properties.


3) I am not sure that selling to an offshore company it going to achieve anything here. This whole issue needs careful planning and analysis of your situation in far more detail. I hope the above gets you started.

Here are a couple of other assets that are considered to be connected with Australia, that may concern you but I do not have enough detail to be sure. Remembering that if the asset is connected with Australia, Australia continues to retain the right to tax it regardless of whether the owner is a non resident.
1) An asset that has been used by its owner at any time to carry on business through a permanent establishment in Australia.
2) A share in a private company that was a resident of Australia when the share was sold

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