New tax laws have introduced a capital gains tax ("CGT") withholding payment regime for foreign resident vendors who sell their interests in Australian real estate. It is important to note that for the most part this new CGT withholding payment regime works on the presumption that all vendors are foreign residents until proven otherwise. Accordingly, it impacts all taxpayers and not just foreign residents.
The new laws will from 1 July 2016 impose an obligation on purchasers of Australian real estate interests to withhold and remit to the Commissioner of Taxation 10% of the purchase price paid where the vendor is a foreign resident and an exemption does not apply. Which transactions are affected by the new CGT withholding payment regime? The acquisition of the following types of Australian real estate interests may give rise to a withholding obligation under the new CGT withholding payment regime:
- direct interests in Australian real property, such as residential property, commercial property, vacant land, a lease of land and mining and quarrying or prospecting rights to the extent that those rights relate to real property;
- company title interests;
- any membership interests in an entity where the vendors interest in that entity where: i) the vendor's interest in that entity is or exceedes 10%; and ii) more than 50% of the underlying value of the entity is derived from real property situated in Australia ("Indirect Interest"); and
- an option or right to acquire a direct interest in Australian real property, a company title interest or an Indirect Interest ("Option or Right").
When will a purchaser not have an obligation to withhold? A purchaser will not have an obligation to withhold where:
- the transaction is conducted through a stock exchange or a crossing system;
- the transaction is already subject to an existing withholding obligation;
- the transaction represents a securities lending arrangement; or
- the transaction involves vendors who are subject to formal insolvency or bankruptcy proceedings.
In addition, a purchaser will not have to withhold in respect of the acquisition of a direct interest in Australian real property or a company title interest, where:
- the relevant Australian real property has a market value of less than $2 million; or
- if the relevant Australian real property does have a market value of $2 million or more, the vendor obtains a clearance certificate from the Australian Tax Office and provides it to the purchaser. The Australian Tax Office has indicated that it will be establishing an automated process of issuing clearance certificates in which the vendor will apply for the certificate online. The clearance certificate can be applied for before a property is sold and will be valid for a period of 12 months.
What if the interest being acquired is an Indirect Interest?
If the transaction involves an Indirect Interest or an Option or Right the purchaser will not have an obligation to withhold, where the vendor makes a declaration (if applicable) to the purchaser that:
- it is an Australian resident (and the purchaser does not have specific knowledge that this declaration is false); or
- the interest being purchased is not an Indirect Interest (and the purchaser does not have specific knowledge that this declaration is false); or
If no declaration is made and the purchaser does not know or have reason to believe a vendor is a foreign resident there also will be no obligation to withhold.
When must the withholding payment be made to the Commissioner of Taxation?
If payable, the amount withheld must be paid to the Commissioner of Taxation on or before the day the purchaser becomes the owner of the property.
Can the amount to be paid to the Commissioner of Taxation be varied?
Yes, and this will have particular application to security holders. Please refer to us for more information on this.