Monday 10 October 2016

Foreign Resident Capital Gains Withholding Tax

Sales of certain taxable Australian property made after 1 July 2016 are subject to a new withholding regime introduced by the Tax and Superannuation Laws Amendment (2015 Measures No 6) Act 2016 (Cth).  Under this regime, purchasers are required to withhold 10 percent of the purchase price on all acquisitions of certain taxable Australian property and remit it to the Australian Tax Office (ATO) unless the vendor provides a clearance certificate.

This measure has been introduced to improve compliance with capital gains tax rules by foreign residents, but will have widespread implications for Australian residents involved in property transactions.

When does the measure apply?

The regime applies to contracts entered into after 1 July 2016 by which the purchaser acquires certain taxable Australian real property, including:

  • Real property in Australia, including land, buildings, residential and commercial property;
  • Lease premiums paid for the grant of a lease over real property in Australia;
  • Mining, quarrying or prospecting rights;
  • Company title interests; and
  • Options or rights to acquire such property or such an interest.

Certain transactions are excluded, including real property interests of less than $2 million, transactions listed on an approved stock exchange, or where the vendor is under external administration or in bankruptcy.

What does this mean for purchasers of property with a market value of $2 million or more?

If the purchaser receives a valid clearance certificate from the vendor, withholding tax is not to be withheld from the transaction and the purchaser can rely on the certificate without making further enquiries.

If the purchaser is not provided with a valid clearance certificate before settlement, the purchaser must withhold 10 per cent of the purchase price and pay it to the ATO on or before the day the purchaser becomes the owner of the asset.  A short grace period applies before interest begins accruing.
Prior to settlement, all purchasers involved in the sale must complete an online Purchaser Payment Notification form, including the details of the vendors and the relevant asset. Once the form is processed, each purchaser will receive a payment reference number, payment slip and barcode.  These are used when making the payment to the ATO via electronic transfer, in person at Australia Post or mailed with a cheque.
There are significant penalties for failing to withhold the required amount, and administrative penalties may also apply.

What does this mean for vendors?

Australian resident vendors of relevant real property will need to apply for a clearance certificate and provide this to the purchaser before settlement to ensure no funds are withheld from the sale proceeds.

Vendors can apply for a clearance certificate at any time via the ATO's online application form.  Where the names of the registered proprietor and the taxpayer are consistent a certificate should be issued automatically within days.  Vendors should apply as early as practicable and check for consistency between ownership and tax records to avoid delays in the process.

A clearance certificate is valid for 12 months from the date of issue and can be used for multiple transactions, provided it is valid at the time the certificate is given to the purchaser.  If there are multiple vendors, each vendor will need to supply a clearance certificate to the purchaser.
Vendors will only receive credit for the tax withheld if the purchaser pays the relevant amount to the ATO.  Vendors should therefore ensure that appropriate contractual mechanisms are in place to cover these new obligations.

Significance to clients

This measure will need to be considered for every transaction involving Australian real property or any entity whose underlying value is principally derived from Australian real property.  The regime has broad application and will impact on a significant number of transactions, including where vendors are in fact Australian residents for tax purposes.

The Law Council of Australia, the Law Institute of Victoria and the Law Society of New South Wales have raised concerns about this initiative in a submission to the Federal Government, specifically that it will generate 'uncertainty, delays and a significant administrative burden' for Australians who purchase real estate with a market value of $2 million or more.
We will keep you informed if the ATO  issues rulings which exempt Australian government departments from the need to:

  • obtain clearance certificates when they are a vendor; or
  • remit the withholding tax to the ATO when they are a purchaser.

You can find out more on the ATO website.If you would like to discuss the impact on your department or agency, please contact:

Anthony Leggiero
Managing Principal Solicitor
03 9947 1430

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