The Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015 received Royal Assent on 25 February 2016. Effective 1 July 2016, the legislation introduces a new foreign capital gains withholding tax regime that will assist the Australian Taxation Office (ATO) collect foreign residents’ Australian tax liabilities arising from the sale of property.
Clearance certificates, which are valid for 12 months, can be obtained by application to the ATO, and verify that the vendor is a resident or has been exempted from the withholding tax. With an aim to provide purchasers certainty regarding their withholding obligations, the certificate must be provided by the vendor on all transactions involving taxable Australian real property and company title interests.
In straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within 1–14 days. A non-resident or temporary resident cannot obtain an ATO certificate; therefore, the purchaser will be required to withhold 10 per cent of the sale price.
Where a clearance certificate is not provided by the time of settlement, the purchaser must register and withhold 10 per cent of the proceeds and forward this amount to the ATO on settlement. Prior to this, a Purchaser Payment Notification form must be lodged with the ATO to obtain the details required to make the payment. The penalty for a purchaser failing to withhold is equal to the amount that was required to be withheld and paid.
In the event that withholding tax has been paid to the ATO, the foreign vendor will need to lodge an Australian tax return for the relevant year to make a claim for the withheld funds. The 10 per cent withholding tax credit will be offset against any applicable tax payable by the non-resident and either a top tax or a refund will apply at the time of assessment.
- Real property in Australia – land, buildings and residential and commercial property with value over $2 million.
- Mining, quarrying or prospecting rights.
- Lease premiums paid for the grant of a lease over real property in Australia.
- Interests in Australian entities that predominantly have such assets (i.e. Other Assets that provide an indirect interest in property).
Different requirements will apply for transactions involving Other Assets such as shares, units and options. Australian-resident vendors are able to provide a signed Residency Declaration instead of supplying a clearance certificate, and penalties will be imposed for false and misleading declarations.
Those with foreign interests in their ownership structure are advised to resolve the clearance certificate eligibility or residency declarations (where relevant) before any sale transactions are progressed on the asset classes above.
The new withholding regime will not apply to:
- Real property transactions valued at under $2 million
- On-market transactions in relation to shares, units or membership interests listed on an approved stock exchange
- Transactions subject to another withholding obligation
- Securities lending arrangements
- Transactions where the vendor is in administration or transactions arising from the administration of a bankrupt estate, a debt agreement or a personal insolvency agreement.
What to consider from the vendor’s perspective
- When thinking of selling, is there a possibility your property value may exceed $2 million?
- Ensure sale contracts are up-to-date, allow for the 10 per cent deduction if required and consider declarations about residency as part of the contract.
- For all vendors, including Australian residents, ensure that an ATO clearance certificate has been applied for or remains current well in advance of settlement date.
What to consider from the purchaser’s perspective
- Ensure the contract covers the requirement (if applicable) to withhold 10 per cent of the proceeds upon settlement.
- Confirm receipt of either an ATO clearance certificate (or the Vendor Residency Declaration if applicable) by the time of settlement.
- If no clearance certificate is provided, register for withholding tax on or prior to settlement and pay 10 per cent of the sale proceeds to the ATO.
Vendor variations/ exemptions
Where a vendor is not eligible to obtain a clearance certificate because of their residency status, they can apply to the ATO for a variation to the 10 per cent withholding tax in certain circumstances.
A variation may be granted where the vendor can show that they will not make a capital gain on the disposal (either through a capital loss outcome or eligibility for CGT rollovers) or there are carry-forward losses available to negate any tax liability.
Other circumstances where the ATO may consider a variation include where a vendor has a mortgage security on the property and deduction of the 10 per cent WHT would mean a shortfall of funds to discharge the security, or where there are multiple vendors and only one is a non-resident.
An application for variation will be required in the approved form from the vendor and the ATO has indicated these may take up to 28 days to process. The ATO will then issue a notice of variation stating the revised amount to be withheld (or none). The notice should be supplied to the purchaser prior to settlement.
Issues to note
The scope of the provisions appears to be wider than expected, with the following scenarios presenting potential unintended consequences that call for a cautious approach.
- The provisions may apply to a deemed acquisition; for example, the transfer of a property from a deceased to the executors of the estate.
- Where a trustee is disposing of property there could be a delay in obtaining a clearance certificate if there are non-resident beneficiaries of the trust.
- When a change of trustee involves the transfer of property held in trust, a clearance certificate may be required by the exiting trustee.
- The $2 million threshold will not apply to transfers of securities (i.e. shares, options and units).
- The ATO has advised that if a trustee is selling land, the clearance certificate must be in the name of the trustee.
- Withholding tax may be required even when there are no CGT consequences; for example, where property settlements are occurring with a non-resident spouse.
- New standard contracts will be issued by the Real Estate Institute of Queensland and the Queensland Law Society incorporating the changes.
- The ATO will release its automated application for clearance certificates in late June 2016.
It is hoped that the ATO will provide further guidelines regarding how it plans to administer the rules, to afford practitioners certainty regarding these various scenarios and allow them to plan processes accordingly.