Tax treatment of property sales is set to change. This guide will give you the necessary information to ensure you are up to date.
The Tax and Superannuation Laws Amendment (2015 Measures No.6) Act 2016 (Act) came into effect on February, 25 this year. The Act implements the Federal Government’s promise to introduce a new foreign resident capital gains tax (CGT) withholding regime.
Under the regime, where a foreign resident disposes of certain ‘taxable Australian property’ the purchaser will be required to withhold 10 per cent of the purchase price and pay that amount to the Australian Taxation Office (ATO).
The amount withheld represents the vendor’s potential CGT liability. The purpose of the Act is to address the ‘extremely low levels’ of voluntary compliance with the old foreign resident CGT regime. The new withholding regime will apply to contracts entered into on or after 1 July
2016. The regime will have practical consequences for all vendors and purchasers of Australian land. It is therefore timely that the changes under the new withholding regime be considered. The obligation to withhold and remit CGT will apply if the following conditions are satisfied: The asset acquired is a relevant Australian asset, the vendor of the property is a relevant foreign resident, the acquisition is not an excluded transaction.
The withholding obligation arises when a purchaser acquires an asset that is:
- Taxable Australian real property including land, buildings, residential and commercial property situated in Australia.
- Mining, quarrying or prospecting rights
- An indirect Australia real property interest. An indirect interest is an interest of 10pc or more in an Australian entity that predominantly holds any of the above assets
- An option to acquire the above property or interests
The focus of this article will be on the disposal and acquisition of real property.
The new withholding regime only applies if the vendor is a ‘foreign resident’. Under the new regime, an entity will be deemed to be a “foreign resident” if, at the time of the transaction, the CGT asset to which the transaction relates is real property and the vendor has not obtained a clearance certificate from the Commissioner (clearance certificates are discussed below). It must be noted that this presumption applies even if the vendor is in reality an Australian resident.
The acquisition of real property is excluded from the scope of the withholding regime if the land has a market value of less than $2 million. This exception is designed to exclude the majority of residential sales. There are a number of other transactions excluded from the scope of the withholding regime.
McInnes Wilson Lawyers are able to provide further advice in this regard. The regime will be administered through Clearance Certificates.
Who must apply for a clearance certificate?
For real property transactions with a market value of $2 million or above, the vendor must apply for a clearance certificate from the ATO. Importantly, this obligation applies to all vendors of relevant assets in Australia with a market value of $2 million or above, whether or not the vendor is a foreign resident.
When will a clearance certificate be issued?
The vendor may apply for a clearance certificate at any time they are considering the disposal of real property. In straightforward cases, it is expected that clearance certificates will be provided within 1-14 days.
PURCHASERS OBLIGATIONS AND TIMING OF PAYMENT
The 10pc withholding tax must be paid to the ATO on or before the date of settlement. If the purchaser fails to withhold a CGT amount where it is required to do so, the purchaser may be subject to a penalty equal to the CGT amount which should have been withheld.
The new withholding regime has a wide application and will apply to purchasers regardless of whether they are Australian or foreign residents. Vendors must be aware of the requirement to obtain an ATO clearance certificate to ensure no funds are withheld from sale proceeds. Contracts and standard form documentation will need to be amended, for example to include the requirement to supply an ATO clearance certificate when disposing of real property. In addition, the new regime may have serious implications for satisfying securities granted over real property. The regime may also lead to cashflow issues and have several personal tax consequences.