Foreign residents exploiting asset valuations to avoid capital gains tax

A foreign resident vendor with an existing interest of greater than 10% in Australian real property held indirectly through a chain of interposed entities intends to dispose of some or all of that interest. 2. Prior to the disposal, the vendor attempts to change the ratio of TARP to non-TARP assets through strategies such as: (i) injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by: (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). (ii) selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis. 3. If the market value of TARP assets does not exceed the market value of non-TARP assets, the foreign resident vendor argues that it does not pass the principal asset test, resulting in the interest disposal in the test entity being disregarded.