Effective from 1 July 2016, the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 (Cth) introduces a new foreign capital gains withholding tax regime which was intended to facilitate the ATO in the collection of capital gain tax (CGT) arising from the sale of real estate by foreign investors. However, the new legislation effects all settlements and may have unexpected implications.
From 1 July 2016, it is presumed that the vendor of real property is a non-resident and the purchaser has to withhold 10% of the proceeds and pay it to the ATO unless a Clearance Certificate has been obtained prior to settlement.
What follows is an overview of the transactions affected by the new regime and clearance documents requirements.
Transactions Subject to the New Regime
Regardless of the taxation residency of the vendor and whether tax is in fact payable, transactions involving a change of ownership in the following assets are subject to the new CGT withholding regime as follows.
- Unless a Clearance Certificate or valid exemption is provided, withholding is required where the following assets have a value of $2,000,000 or more:
- taxable Australian real property including:
- real property in Australia such as land and buildings, both residential and commercial;
- mining, quarrying or prospecting rights;
- lease premiums paid for the grant of a lease over real property in Australia;
- indirect Australian real property interests that provide a company title interest.
- taxable Australian real property including:
- The following assets (no minimum threshold requirement) could require withholding to be made:
- indirect Australian real property interests, e.g. shares and units, which are holdings of 10% or more in any entity whose assets are predominantly Australian real property, i.e. more than 50% of total market value of the asset.
- Transactions involving the option or right to acquire any of the assets types classes in (1.1) and (1.2) above will attract the withholding obligations as well.
For the assets referred to in (1.2) above, where the transferee has reasonable grounds to believe the transferor is an Australian resident there will be no obligation to withhold the tax. Otherwise, a Vendor Declaration should be obtained from the transferor to confirm its Australian residency or that the sale represents less than a 10% interest in the entity or the entity’s assets are not predominantly Australian real property.
Clearance certificates can be obtained by application to the ATO and will verify that the vendor is a resident. The certificate will be valid for 12 months and must be provided by the vendor in respect of transactions involving all taxable Australian real property and company title interests. The Clearance Certificate aims to provide certainty to purchasers regarding their withholding obligations.
Where a Clearance Certificate is not provided by the time of settlement, the purchaser must register and withhold 10% of the proceeds, then make payment of this amount to the ATO on settlement.
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% withholding tax credit will be offset against any applicable tax payable by the non-resident and if the withholding tax is greater than the tax that would be assessed, the excess will be refunded at the time of assessment.
The new CGT withholding regime does not apply to the following transactions:
- real property transactions valued at less than $2,000,000;
- 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.
If a vendor is not eligible to obtain a Clearance Certificate because of their residency status, in certain circumstances they can apply to the ATO for a variation of the 10% withholding rate.
A variation may be granted if the vendor can show that they will not make a capital gain on the sale or they have carried forward losses to negate tax liability. The ATO may also consider granting a variation if a vendor has a mortgage on the property and withholding of 10% of the sale proceeds would result in a shortfall of funds to repay the mortgage.
Conveyancing Lawyers Sydney at Pavuk Legal can provide you with a sound legal advice in respect of duty implications of your private or business transactions and assist you with their structuring and documenting. We can provide assistance for a range of related legal matters, including conveyancing, buying and selling a business, lease agreements, intellectual property law, shareholders, partnership and joint venture agreements, asset protection, estate and succession planning, advice in regard to tax law including capital gain tax.
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