By John Turnbull, Partner
From 1 July 2016, purchasers of certain ‘taxable Australian property’ from foreign tax residents will be required to pay 10% of the total purchase price to the Australian Taxation Office (ATO).
As a successful agent, it is vital you inform both the vendor and purchaser of their obligations under the new regime, so settlement can proceed with no impediments.
So what are the key elements of the regime you need to be aware of?
- Purchasers need to withhold 10% of the purchaser price on properties $2 million dollars and above unless the Vendor has given them a valid ATO clearance certificate or variation certificate. If there are multiple vendors, each Vendor needs to obtain a certificate.
- The amount withheld should never need to be deducted from the deposit held by the Agent (and from which their commission is paid). This is because the purchaser will want to ensure that it meets its withholding obligation, if any. The amount withheld by the purchaser will be paid to the ATO on settlement.
- Whilst the Agent does not have a specific legal obligation under these rules, prudent agents will advise their vendors to obtain the clearance certificate early to ensure that settlement can occur on time.
Exemptions in more detail – resulting in no requirement to withold
- Vendor clearance certificates
To remove the requirement for the purchaser to withhold, vendors or their Agents can apply for a “clearance certificate” from the ATO. Essentially, the clearance certificate provides that the vendor is an Australian tax resident.
The ATO have stated that it will implement an automated process for clearance certificate applications. With respect to timeframes, the ATO has provided that:
- Straight forward applications will be assessed within 1-14 days;
- Where there are data irregularities, applications will be assessed within 14 to 28 days; or
- Applications will take longer to be assessed in higher risk or unusual situations where manual intervention is required by the
Given the above, Agents should recommend to their vendors to apply for a clearance certificate as soon as possible. Ideally, this would be at least 3 months prior to settlement of a property.
Taking this prudent approach will minimise the risk of delays in settlement of the property sale and will ensure that the purchaser will not be required to withhold.
Forms will be made available on the ATO website.
- Withholding variation requests
If obtaining a clearance certificate is not an option, then either the vendor or purchaser can apply for a variation request to the lower the withholding rate, including to nil (Variation).
The ATO have provided that a Variation may be made in the following (non-exhaustive) circumstances:
- Where the foreign resident vendor will not make a capital gain on the sale of the property; or
- Where the foreign resident will not have an income tax liability; or
- Where only one (of several) of the vendors is a foreign resident; or
- 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.
The ATO has stated that it will provide responses to variation requests generally within 28 days. Accordingly, if this is an option that either the vendor or purchaser would like to pursue then we recommend that a variation request is made to the ATO well in advance of settlement.
Practical implications where there is a withholding requirement
- Ensuring purchasers comply with the withholding requirement
The withholding amount must be paid to the ATO before settlement of the property takes place. This withholding amount will need to be paid to the ATO as follows:
- By way of electronic payment for large withholders; and
- By way of electronic means or another approved form by the ATO (this is likely to include payment by cheque) for small to
Purchasers should be aware of the practical issues of this for settlement of a property. Usually, 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. Thus, whilst the ATO has indicated they may provide a grace period for compliance, watch this space for what this means practically. In all cases, this process will need to be actively managed by Agents and the relevant financiers.
- Vendors should obtain evidence from purchasers that they have withheld
Vendors are only entitled to a credit for the withholding amount remitted by the purchaser if those amounts have been paid to the ATO.
Accordingly, it is important for Agents to recommend to their vendors to obtain evidence from purchasers that the withholding obligation has been complied with. This might also be added as a requirement to the contract of sale if necessary.
- Settlement Adjustments
If there are settlement adjustments to be made on settlement which result in a greater amount payable by a purchaser on completion, then arguably the purchaser may not have fully complied with its withholding obligation if the higher amount is not withheld.
Accordingly, it would be prudent for the purchaser to seek to be indemnified by the vendor for any penalties associated with this in the contract of sale.
The withholding obligation rules for purchasers are complex and thus have only been discussed above at a very high level. In order to offer the best advice to vendors and purchases, and ensure the smooth transaction of a property, it is wise to seek legal advice.
If you require any assistance regarding how the new withholding rules work or would like to implement systems to ensure compliance with the new withholding requirements, we would be pleased to assist; ensuring you provide the best possible service to your clients.
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