Treasury has released for public consultation Exposure Draft legislation introducing a non-final 10% withholding tax on acquisitions of direct and indirect interests in Australian land from foreign vendors.
The proposed new regime (first announced in the 2013 – 2014 Federal Budget in May 2013 (see G+T Australian Federal Budget 2013 - 14 - Key Tax Issues Alert)) would capture the acquisition of direct interests in land as well as indirect interests in land, such as shares in a company where the majority of the value of the company is attributable to interests in Australian land.
The purpose of the new regime is to assist in the collection of the foreign resident vendor’s capital gains tax (CGT) liabilities, and under the proposed new rules, where the purchaser of certain Australian assets has reason to believe that the vendor is a foreign resident, the purchaser will be required to withhold and remit 10% of the purchase price to the Australian Taxation Office (ATO) as non-final withholding tax. The vendor may then lodge a tax filing with the ATO seeking a refund to the extent the withholding has resulted in an overpayment of tax, or pay an additional amount to the extent it has resulted in an underpayment.
The withholding obligation will not apply to residential land valued under $2.5million, transactions conducted on an approved stock exchange, or arrangements that are already subject to an existing withholding obligation. Some high-level practical issues we envisage with the new regime include:
- the treatment of cashless transactions (eg, share for share exchanges) under the new rules may be problematic, as the withholding liability to the ATO will need to be settled in AUD;
- the application of the rules in circumstances where the vendor has a legitimate exemption from Australian CGT (eg, where a relevant treaty applies to exempt the vendor from Australian tax, such as the current Germany/Australia tax treaty); and
- the fact that the withholding is based on a proportion of the purchase price, whereas CGT taxes gains, such that a vendor who will make a loss on the disposal may still need to seek a refund of tax from the ATO. In a distressed asset scenario, the time lost in this process may adversely impact creditors.
Submissions on the exposure draft legislation are due by 7 August 2015.