On 31 October 2014, the Government released a discussion paper outlining the proposed design options for implementing the previously announced non-final withholding tax in relation to disposals by foreign residents of certain 'taxable Australian property' assets. The measure is proposed to commence from 1 July 2016.
The measure was originally contained in the former Government's 2013-14 Budget. The current Government announced on 6 November 2013 that it would proceed with the measure.
The release of the discussion paper will be of interest to those foreign investors who may be considering divesting their Australian real property or business assets over the next few years, as well as investors who are considering acquiring such assets from foreign investors over the same time period.
For foreign investors, the discussion paper provides greater detail and highlights some of the issues that are likely to arise in determining whether a withholding obligation will apply in respect of a potential divestment transaction they are involved in. This is likely to be relevant and important to such investors regardless of whether they are subject to Australian tax on the underlying transaction, given the need to obtain a TFN and lodge a tax return to claim any overcollection through the withholding mechanism.
For investors seeking to acquire such assets from foreign investors, the discussion paper provides greater detail and highlights some of the issues that are likely to arise in undertaking due diligence with respect to potential acquisitions from foreign investors. In particular, the discussion paper provides further detail regarding what is required in this regard, which can have significant time, cost and risk implications for such investors.
Overview of the proposed measure
It is proposed that the payer in a transaction will have an obligation to withhold 10 per cent of the proceeds payable in relation to the transaction where:
- the payee is a foreign resident; and
- the transaction involves an asset that is 'taxable Australian property' (which includes direct and certain indirect interests in Australian real estate assets, as well as assets used in carrying on business through a PE in Australia).
The measure is not expected to apply to residential property transactions under $2.5 million. However, vacant land is expected to remain within the scope of the withholding tax measure.
The proposed measure is also expected to apply to all relevant disposals from 1 July 2016, irrespective of when the asset was acquired.
The amount withheld (being, 10 per cent of the proceeds payable in relation to the transaction) is proposed to be a non-final payment of tax. It is expected to be credited to the account of the foreign resident payee when calculating their final income tax position for the relevant income tax period. This would generally require the foreign resident to have a tax file number and to have lodged an Australian tax return.
What are the key issues requiring further consideration and consultation?
The discussion paper describes the proposed design for implementing the non-final withholding tax regime, including options for reducing the compliance burden and red-tape associated with the withholding obligation.
In this regard, it is encouraging to see that a number of the practical issues associated with the imposition of a non-final withholding tax of this kind have already been given early consideration. However, there are still a number of key matters requiring further consideration when designing the proposed regime.
Some of the key matters requiring further consideration and consultation can be summarised as follows:
- the process to be followed by the payer in order to establish if there is a withholding tax obligation. This is expected to require the payer to make some additional enquires (e.g. as part of an extended due diligence process). Alternatively, consideration will need to be given to whether it is appropriate to permit the payer to rely on declarations provided by the payee (which is similar to the system that operates in the United States).
- the timing of any such withholding tax obligation. The payer is likely to be required to withhold 10 per cent of the proceeds at the time the relevant payments are made and remit this amount to the Commissioner, subject to appropriate modifications in circumstances where the foreign resident payee is paid by instalments.
- the information to be provided to the ATO when remitting an amount withheld. This information may be necessary in order to enable the withheld amount to be credited by the Commissioner to the correct payee.
There are also a number of options being considered for reducing the compliance burden and red-tape associated with the withholding obligation, as well as various options to enable the measure to be implemented more effectively. These include:
- permitting reliance on payee declarations (noted above);
- considering how the regime should apply to listed assets (where it may be difficult for the payer to make enquiries into the tax residency status of the payee and whether the asset is ‘taxable Australian property’);
- considering how the non-final withholding tax will apply where foreign investors dispose of their assets via Australian custodians (e.g. whether the withholding obligation should be imposed on the Australian custodian in those circumstances);
- assessing the practical benefits of implementing an ATO clearance certificate process (which is similar to the approach adopted by Canada); and
- providing the Commissioner with a discretion to vary the amount to be withheld by a payer (e.g. where the amount to be withhold would be different from the ultimate tax liability of the foreign resident). A variation power may also be necessary in situations where the imposition of the withholding tax may prevent the completion of a transaction (e.g. if insufficient funds become available after an amount has been withheld to discharge a mortgage over real property prior to the settlement of the contract).
What further actions should investors consider undertaking?
Affected investors (being both foreign investors considering future divestments and investors consider future acquisitions from foreign investors) should consider the impact of the proposed measure on any contemplated transaction, as well as the issues highlighted in the discussion paper.
On this basis, affected investors should consider whether and the extent to which they wish to participate in consultation regarding this measure. Submissions regarding the discussion paper close on 28 November 2014.
A copy of the discussion paper can be found here.