ATO ID 2008/46: Foreign residents and indirect Australian real property interests
Date of decision: 6 March 2008
Year of income: Year ended 30 June 2008
Business line: Public Groups and International

Issue
Is the non-portfolio interest test under subparagraph 855-25(1)(a)(ii) of the Income Tax Assessment Act 1997 (ITAA 1997) satisfied if a foreign resident holding company and its foreign resident associates cumulatively held a direct participation interest in an Australian resident company exceeding 10% for 12 months, without their individual holdings spanning those 12 months?

Decision
Yes. As the sum of the foreign resident holding company's and its foreign resident associates' direct participation interests in the Australian resident company exceeded 10% throughout 12 months, the non-portfolio interest test is satisfied throughout a 12 month period within subparagraph 855-25(1)(a)(ii) of the ITAA 1997.

Facts
The taxpayer is a foreign resident holding company with two foreign resident associates. On 1 January 2007, the first associate acquired a direct participation interest of 15% in an Australian resident company. On 1 June 2007, the first associate transferred that interest to the second associate. On 1 December 2007, the second associate transferred 9% of its interest in the Australian resident company to the taxpayer. The second associate retained its remaining 6% interest. On 1 January 2008, the taxpayer and the second associate disposed of their respective 9% and 6% direct participation interests in the Australian resident company. Between 1 January 2007 and 1 January 2008, the Australian resident company's assets consisted entirely of real property situated in Australia.

Reasons for decision
Summary: A capital gain or capital loss from a CGT event is disregarded if you are a foreign resident just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not taxable Australian property: subsection 855-10(1) of the ITAA 1997. The taxpayer was a foreign resident just before the disposal of its CGT asset, consisting of its direct participation interest in the Australian resident company. Taxable Australian property includes a CGT asset that is an 'indirect Australian real property interest': item 2 of the table in section 855-15 of the ITAA 1997. Subsection 855-25(1) of the ITAA 1997 provides: A membership interest held by an entity (the holding entity) in another entity (the test entity) at a time is an indirect Australian real property interest at that time if: An interest held by the holding entity in the test entity passes the non-portfolio interest test at a time if the sum of the 'direct participation interests' held by the holding entity and its 'associates' in the test entity at that time is 10% or more: section 960-195 of the ITAA 1997. The taxpayer and its associates cumulatively held direct participation interests in the Australian resident company between 1 January 2007 and 1 January 2008. That 12 month period began no earlier than 24 months before 1 January 2008 and ended no later than that time. The sum of their direct participation interests exceeded 10% throughout that 12 month period. Therefore, as the sum of the taxpayer's and its foreign resident associates' direct participation interests in the Australian resident company exceeded 10% throughout a 12 month period which began no earlier than 24 months before 1 January 2008 and ended no later than that time, the requirements of subparagraph 855-25(1)(a)(ii) of the ITAA 1997 are met. The taxpayer's interest in the Australian resident company also passes the principal asset test in section 855-30 of the ITAA 1997, as 100% of the market value of the Australian resident company's assets was attributable to real property situated in Australia (which is taxable Australian real property of the Australian resident company): subsection 855-30(2) of the ITAA 1997. Therefore the taxpayer's interest in the Australian resident company is an indirect Australian real property interest. As such, the taxpayer's interest is taxable Australian property. Any capital gain or capital loss resulting from the disposal of the taxpayer's interest can not be disregarded under subsection 855-10(1) of the ITAA 1997. The taxpayer will make a capital gain if the capital proceeds from the disposal are more than the cost base of the CGT asset. Alternatively, the taxpayer will make a capital loss if the capital proceeds are less than the asset's reduced cost base: subsection 104-10(4) of the ITAA 1997. Any resulting capital gain or capital loss must be taken into account in working out the taxpayer's net capital gain or net capital loss for the income year in which the disposal happened.

Legislative references: Income Tax Assessment Act 1997 subsection 104-10(4) subsection 855-10(1) section 855-15 subsection 855-25(1) paragraph 855-25(1)(a) subparagraph 855-25(1)(a)(ii) subsection 855-30 subsection 855-30(2) section 960-195
Subject references: Capital gains CGT taxable Australian assets