The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act was enacted on 25 February 2016.
All purchasers of Australian real property, interests in entities that predominantly hold Australian real property or options over these will be affected by the new foreign resident capital gains tax withholding regime. The new regime will apply to contracts entered into on or after 1 July 2016 (including as a result of an exercise of an option). The changes aim to address the currently low tax compliance of foreign residents who dispose of real property, and interests in real property.
A 10% non-final withholding will apply on purchases of certain Australian assets which are acquired from foreign residents. Purchasers will be required to pay 10% of the first element of the cost base (usually, the purchase price), to the Commissioner.
The obligation to withhold applies to the purchase of an asset that is:
Withholding is not required in any of the following situations:
No withholding required if clearance certificate or declaration obtained from vendor
Withholding will also not be required in the following situations:
Vendors, purchasers and creditors can also apply to the ATO to vary the amount required to be withheld.
ATO’s proposed practice – Clearance Certificates
The ATO has stated that vendors may apply for a clearance certificate at any time at which they are considering the disposal of real property. This can be before the property is listed for sale and is valid for 12 months. The ATO has stated that it is implementing an automated process for issuing a clearance certificate involving:
In relation to timing, the ATO website states:
“In straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within 1 – 14 days. Where there are data irregularities or exceptions, some limited manual processing may be required and the clearance certificates could be provided within 14 – 28 days. Higher risk and unusual cases may also require manual intervention which could take longer.”
This should mean that, in ordinary cases, if no information is held by the ATO which would indicate that the vendor is a foreign resident, the clearance certificate should issue. However, it remains to be seen how this will operate practically and within the timeframes proposed.
Some key practical points
1. All purchasers of Australian real property and indirect interests in real property are affected by these changes
The following contracts and option arrangements should include provisions to deal with the changes:
|(a)||All contracts or option agreements entered into on and after 1 July 2016; and|
|(b)|| All option agreements entered into prior to 1 July 2016 where the contract for sale may be entered into on and after
1 July 2016.
2. Vendors of real property should apply early for a clearance certificate
Despite the ATO’s expected timeframes to issue certificates, vendors should apply for clearance as early as possible, preferably at least 3 months prior to settlement, to minimise potential delays in the sale, and to ensure that the purchaser does not withhold where an exemption applies. The vendor may alternatively seek to include provisions for delayed completion in the event the certificate is not issued in time.
Declarations are vendor specific. For transactions involving multiple vendors, each vendor will need to obtain a clearance certificate.
3. Vendors need to obtain evidence from the purchasers that withheld amounts have been paid to the ATO
Vendors are only entitled to a credit for amounts withheld if those amounts have been paid to the Commissioner. Vendors should require evidence, at settlement, from purchasers that the withholding obligation has been complied with and the payment has been made to the ATO.
4. Purchasers need to ensure, together with their financiers, that the amount withheld is paid to the ATO by the settlement date to avoid penalties
The amount withheld must be paid to the ATO on or before settlement/completion.
Large withholders must pay the amount by electronic payment.
Medium or small withholders can pay by electronic means or any other means approved in writing by the Commissioner. This should include payment by cheque. However, since payments by cheque will be deemed to be made when they are received by the Commissioner, the purchaser will need to ensure that it pays the withheld amount to the Commissioner prior to settlement.
This presents practical issues for settlements since, in the usual case, cheques are only provided on settlement in exchange for clear title. Purchasers and mortgagees can also be reluctant to electronically transfer funds prior to actual settlement, in the event settlement is delayed or the transaction does not ultimately proceed.
5. Withholding is required to be made with respect to the total first element of cost base
If the purchaser pays additional consideration after completion (e.g. “look-through” earnout rights), withholding will be required on those subsequent payments at the time they are made.
6. Settlement adjustments
If there are adjustments to be made under the Contract on settlement, it is unclear how this affects the withholding amount. If there is an adjustment that results in a downward offset to the amount payable by the purchaser, then the purchaser would be prudent to continue to withhold based on the purchase price (disregarding the adjustments). However, if the calculation of the adjustments results in a greater total amount payable by the purchaser on completion, then at a technical level the purchaser may not have fully complied with its withholding obligation if it does not withhold a higher amount (if the adjustments can be counted in the first element of the cost base). The purchaser may seek to be indemnified by the vendor for any penalties associated with this.
7. Knowledge condition – prudent to obtain vendor declaration anyway (for IARPI and options to acquire TARP or IARPI)
If a purchaser does not know or does not reasonably believe the vendor is a foreign resident, they can avoid the requirement to withhold on the basis of the knowledge condition. However, since the obligation to withhold rests on the purchaser (resulting in penalties if not complied with), in practice, purchasers should ensure that the vendor declaration is in the first instance included in the contract as a warranty. The purchaser can rely on this declaration, unless they know it to be false. The EM states that the purchaser will only know the declaration to be false if they are a party to the fraud committed by the vendor or must have knowledge that the declaration is completely implausible.
8. Variation requests must be provided to the purchaser to be valid
The ATO website states that, in most cases, responses to variation requests will be provided within 28 days. Either party can apply for the variation to lower the withholding rate, including to nil. However, in most cases we would expect the vendor, or an interested creditor, to apply. The EM provides the following examples of when a variation may be made:
|(a)||Where the foreign resident vendor will not make a capital gain (e.g. due to a capital loss or roll-over);|
|(b)||Where the foreign resident will not have an income tax liability (e.g. due to offsetting losses);|
|(c)||Where only one of the vendors is a foreign resident; or|
|(d)||Where a secured or unsecured creditor is concerned there will not be sufficient proceeds from sale to discharge their debt and meet the withholding requirement.|
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