On 1 July 2016, the application of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015 commences.
The purpose of the new regime is to assist in the collection of foreign residents’ capital gains tax (CGT) liabilities, and amends the Income Tax Assessment Act 1997 (ITAA 1997) to impose withholding obligations on the purchase of certain Australian assets.
For tax purposes, a foreign resident is a person other than a resident as defined in subsection 995-1(1) of the ITAA 1997.
Foreign residents are subject to CGT on any capital gains they make from the disposal of certain Australian assets. Foreign residents are required to lodge tax returns if they have derived Australian assessable income, including from a capital gain.
The new regime will apply to the acquisition of an asset where the vendor is a relevant foreign resident disposing of:
- taxable Australian real property;
- an indirect Australian real property interest; or
- an option or right to acquire such property or such an interest.
In these circumstances, purchasers will be required to pay 10 per cent of the first element of the cost base (usually, the purchase price) to the Commissioner. The cost base will include the market value of any property given in respect of acquiring the CGT asset.
No obligation will be imposed in any of the following situations:
(i) transactions involving Taxable Australian Real Property valued at less than $2 million;
(ii) an arrangement that is already subject to an existing withholding obligation;
(iii) a securities lending arrangement; or
(iv) transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings;
(v) ‘on-market transactions’ that are conducted on an approved stock exchange.
The required amount to be withheld must be notified and paid to the Commissioner on or before the day the purchaser becomes the owner of the property, and must be made through an electronic payment method approved by the Commissioner.
This is to be distinguished from the time the purchaser is taken to have acquired the asset for CGT purposes.
Foreign Residents should take caution in setting commercial terms, and should seek advice to ensure they understand the ramifications of a relevant disposal, including any ramifications flowing from contract breaches.