With effect from 1 July 2016, the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015 (Cth) (Act) imposes a 10% non-final withholding obligation on the purchasers of direct and some indirect interests in Australian real property.
The intent of the Act is to minimise leakage from the Australian tax system of the capital gains made by foreign residents on the disposal of certain property, however a closer examination of the Act indicates that it will have implications for purchasers and sellers of these interests, regardless of the residency of the vendor.
The 10% non-final withholding obligation applies to the purchasers of “certain acquisitions” of direct and indirect interests in Australian real property only (see below), unless there is a specific certificate obtained from the Commissioner (only for taxable Australian real property), sufficient proof of the vendor's Australian tax residency or the transaction is otherwise excluded (see below).
WHAT IS A “CERTAIN ACQUISITION” OF DIRECT AND INDIRECT INTERESTS IN AUSTRALIAN REAL PROPERTY?
The non-final withholding obligation arises when a purchaser acquires a CGT asset that is:
- a direct interest (including a lease) in real property in Australia, including a mining, quarrying or prospecting right to minerals, petroleum or quarry materials situated in Australia;
- an indirect Australian real property interest. That is, the purchase of an interest in an entity in which the purchaser or its associates will hold a 10% interest, and the value of the interest in the entity is principally attributable (greater than 50%) to Australian real property; or
- an option or right to acquire such property or interest described above.
WHAT IS AN EXCLUDED TRANSACTION?
Transactions excluded from the withholding obligation imposed by the Act include:
- the purchaser is able to establish that the vendor is an Australian resident (see below);
- entered into prior to 1 July 2016 (however, note options granted pre 1 July but exercised post 1 July are not excluded);
- direct interest in Australian real property that has a market value of less than $2 million - there is no such threshold for acquisitions of interests in entities or for grants of options/rights. However, please note that indirect Australian real property interest that is a company title interest where the value of the relevant interest is less than $2 million is an excluded transaction;
- transactions that are conducted on a stock exchange or on a broker-operated crossing system;
- where other withholding obligations apply;
- securities lending arrangements; or
- where the vendor resident is bankrupt, under external administration or subject to similar circumstances.
WHO IS A FOREIGN RESIDENT?
TRANSACTION RELATES TO THE ACQUISITION OF AN INTEREST IN LAND OR A COMPANY TITLE INTEREST
The vendor will be treated as a foreign resident unless a clearance certificate is obtained from the ATO stating that the vendor is not a relevant foreign resident or the transaction is an excluded transaction (see above).
If no clearance certificate is given by the vendor to the purchaser, the purchaser must withhold, regardless of the whether the vendor can establish they are an Australian resident or not using another means.
In relation to clearance certificates, the ATO has advised:
- clearance certificates will remain valid for 12 months from the date of issue;
- it will take at least 14 days but up to 28 days in some instances for the ATO to process a clearance certificate. However, the ATO has flagged that for high risk or unusual transactions, it may take greater than 28 days for a clearance certificate to be issued; and
- where a transaction concerns multiple vendors, each vendor must obtain their own clearance certificate.
TRANSACTION RELATES TO THE ACQUISITION OF AN OPTION OR RIGHT OR AN INDIRECT AUSTRALIAN REAL PROPERTY INTEREST (OTHER THAN A COMPANY TITLE INTEREST)
The vendor will be treated as a foreign resident, unless one of three situations apply:
- the vendor provides the purchaser with a declaration that the vendor is not a foreign resident, and the purchaser knows this declaration not to be false; or
- the purchaser has reasonable grounds, applying the knowledge tests, to believe the vendor is not a foreign resident; or
- the transaction is an excluded transaction (see above).
CALCULATING THE AMOUNT PAYABLE TO THE ATO
The withholding amount is equal to 10% of the first element of the purchaser’s cost base of the asset (i.e. generally the purchase price), less any option fee paid by the purchaser in respect of the asset.
The withholding amount is due and payable on or before the date of settlement of the transaction. The ATO will require purchasers to notify them about the transaction to which the payment is to be made ahead of time.
The ATO may penalise a purchaser if they fail to withhold an amount. The penalty payable is equal to the amount the purchaser should have withheld on the transaction, plus interest.
VARYING WITHHOLDING AMOUNTS PAYABLE TO THE ATO
A purchaser, a foreign resident vendor or a secured creditor of the vendor may make an application to the ATO to vary the amount of withholding payable by the purchaser in respect of a particular transaction.
KEY TAKEAWAYS ON THE FOREIGN RESIDENT CGT WITHHOLDING REGIME
Key takeaways on the new foreign resident CGT withholding regime include:
- the application of the regime does not just apply to foreign resident vendors, there are compliance obligations for Australian resident purchasers and vendors;
- consideration should be given at the front end of all purchase transactions as to whether the withholding regime applies, with special conditions and warranties drafted to protect vendor and purchaser’s interests;
- applications for clearance certificates or variations of the withholding rate should be made early in the course of a transaction;
- for the purchase of interests other than interests in land or a company title interest, purchasers should complete early investigations to determine the residency of the vendor and whether any declaration made by a vendor is reliable;
- the application of the CGT withholding regime should be considered for existing long term put and call options that were not exercised prior to 1 July 2016; and
- when acting for a secured party in the release of an asset affected by the withholding regime, consider whether the proceeds of the sale will provide a full release or if a variation application should be made to the ATO.