In brief - Foreign resident vendors, purchasers and advisers should consider impact on affected property transactions
Following the passing of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016
, a new capital gains withholding tax regime came into effect on 1 July 2016. Under the new regime, purchasers of certain Australian assets from a "foreign resident" will be required to withhold and remit 10% of the total consideration to the Australian Taxation Office (ATO).
New capital gains withholding regime applies under certain conditions
The new regime aims to address the currently low tax compliance of foreign residents who dispose of real property, and interests in real property.
While protecting the integrity of the foreign resident capital gains tax (CGT) regime, the new withholding regime also applies where the disposal of such taxable Australian property by a foreign resident generates gains on revenue account and, as a result, is taxable as ordinary income, rather than as a capital gain.
In order for the new regime to apply, the following conditions must exist:
- the asset acquired must be a relevant asset
- the vendor of the property must be a "foreign resident", and
- the acquisition must not be an excluded transaction
Relevant assets are taxable Australian real property, indirect Australian real property interests, and options or rights to acquire either
The new withholding regime applies to acquisitions of the following assets that are currently subject to Australian CGT on disposal by non-resident owners:
- taxable Australian real property (TARP) which includes:
- land, buildings and residential and commercial property in Australia
- lease premiums paid for the grant of a lease over real property in Australia, and
- mining, quarrying or prospecting rights (if the minerals, petroleum or quarry materials are situated in Australia)
- an indirect Australian real property interest (IRPI), which is, broadly, an interest of 10% or more in an entity whose assets comprise more than 50% Australian real property by market value
- an option or right to acquire TARP or an IRPI
Foreign resident status determined differently for relevant assets
In relation to TARP, any vendor will be treated as a "foreign resident" unless it provides an issued clearance certificate confirming that it is a resident. This is irrespective of whether or not the vendor is in fact a resident for tax purposes.
In the case of an IRPI and options or rights over TARP or an IRPI, a vendor is only a foreign resident:
- if the purchaser knows or reasonably believes that the vendor is a foreign resident, or
- if the vendor has an overseas address or provides a place for payment that is overseas
However, if the vendor provides a declaration that it is an Australian resident or that the relevant asset is not an IRPI, the new regime does not apply (provided that the purchaser does not know that declaration to be false).
In the case of joint owners, the withholding regime will apply if one owner is a foreign resident, irrespective of how many owners there might be.
Exclusions from withholding regime may apply
A transaction that results in the acquisition of an asset is excluded from the withholding regime under the Act if any of the following apply:
- the TARP has a market value under $2 million
- the IRPI is a company title interest and the value of company title interest is under $2 million
- the transaction is conducted on an "approved stock exchange" or using a "crossing system"
- the transaction is a securities lending arrangement
- the transaction is subject to another withholding obligation
- the foreign resident is under external administration or bankruptcy
Note that the monetary exclusions do not apply to an IRPI that is not a company title interest with the result that withholding may be required irrespective of the value of the IRPI.
Clearance certificates provide exclusion from withholding tax
The legislation contains a clearance certificate exclusion. The effect of a clearance certificate is that withholding tax is not required to be withheld from the transaction.
The vendor may apply for a clearance certificate at any time it is considering the disposal of real property. This can be before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the purchaser prior to settlement.
The ATO has implemented an automated process for issuing clearance certificates. It involves:
- the vendor (or its agent) completing an online "Foreign resident capital gains withholding clearance certificate application" form
- the information on the application being automatically checked against the information held by the ATO to assess if the vendor should be treated as an Australian tax resident for the purposes of the transaction
- where there are no data irregularities or exceptions that require manual processing, a clearance certificate being automatically issued. (If manual processing is required it may take 14-28 days before the certificate is issued or longer in higher risk and unusual cases)
If the vendor is unable to provide the purchaser with a clearance certificate, the purchaser must withhold 10% of the first element of the asset's cost base and pay this to the ATO. The asset's cost base will generally be the amount paid less any entitlement of the purchaser to input tax credits, but market value may be used in circumstances where:
- no consideration was given
- where the consideration cannot be valued, or
- where the parties are not dealing with each other at arm's length
Variation application may be possible if vendor not entitled to clearance certificate
Where the vendor is not entitled to a clearance certificate, but a withholding of 10% is inappropriate, the vendor or other party can apply for a variation. The vendor or other party will need to complete an online "Foreign resident capital gains withholding rate variation application" form requesting a lesser withholding rate be determined by the ATO.
A variation may be sought where:
- the transaction attracts a rollover relief or an exemption under the capital gains tax regime
- there is no capital gain
- the transaction is tax sheltered
- there are multiple vendors of which only some are foreign residents, or
- the withholding gives the ATO priority over a secured creditor (for example, where all the sale proceeds are required to extinguish the vendor's liability)
Purchaser obligations for paying and reporting withholding amounts
Where a withholding obligation exists, the purchaser must withhold the relevant amount and complete an online "Foreign resident capital gains withholding purchaser payment notification" form that provides details of the vendor, purchaser and the asset being acquired.
Once the form is received by the ATO, the purchaser will receive a payment reference number and payment slip for the withheld amount. The purchaser must pay the withheld amount on or before settlement.
If the purchaser fails to pay the withheld amount, the purchaser will be liable for that amount. Penalties may also be imposed.
Vendors, purchasers and their advisers should consider withholding regime for every affected property transaction
The introduction of the foreign resident capital gains withholding regime has widespread implications. It appears somewhat unclear why the government has decided to introduce such a broad regime that will, in many cases, not result in additional tax collections but instead simply add a layer of complexity for transactions which involve Australian real property, or shares or units in entities which hold Australian real property.
While withholding in essence may not be required in many transactions, parties and their advisers will need to consider the regime in every transaction involving affected property.
The authors gratefully acknowledge the assistance of Kate McCormack and Victoria Walker in the preparation of this article.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.