As of 1 July 2016, purchasers of certain assets will be required to withhold, at settlements of purchases, 10% of the total consideration (generally the purchase price, plus GST if applicable), from vendors who are foreign residents for tax purposes and pay it directly to the Australian Taxation Office (ATO).
What type of contracts will this apply to?
The law applies to contracts or options entered into on or after 1 July 2016 for Taxable Australian Real Property (TARP) (being, land, buildings, residential or commercial property) having a market value of or over $2 million.
This will include any sale contract that comes into existence on or after 1 July 2016 as a result of the exercise of an option, (put or call), on or after that date, even though the option agreement was made before 1 July 2016.
The law also applies to various other types of assets including certain mining rights, indirect property interests (e.g. shares in landowning companies) and leases where premiums have been paid. In this publication we will deal principally with real estate (TARP).
Where a vendor and purchaser are not dealing at arm’s length (for example, they are members of the same family), evidence of the market value of the property will need to be obtained and the amount to be withheld will be based on that evidence.
The withholding obligation does not apply to deposits paid at the time of signing of a contract.
While there will only be a requirement to withhold money where the vendor is a foreign resident for tax purposes, vendors will have to prove that they are not foreign residents to avoid having funds withheld by purchasers at settlement.
The penalty a purchaser will incur if it fails to withhold when required will be an amount equal to the amount that was required to be withheld or the unpaid amount if there is a shortfall.
If the penalty is unpaid when it falls due, interest will also apply for each day it is unpaid.
The ATO has stated that there will be a grace period within which the money can be paid to the ATO after settlement, but at present the ATO has not stated what that grace period will be.
A property is purchased from a foreign resident for $2.5 million plus $250,000 GST.
The amount to be withheld and paid to the ATO is 10% of $2,750,000, which is $275,000.
The purchaser will be required to pay $275,000 to the ATO in addition to the $2.5 million plus GST plus or minus adjustments paid to the Vendor if the amount required to be withheld and paid to the ATO is not withheld at settlement and paid to the ATO.
Interest will also be payable by the purchaser for every day after settlement that the money is unpaid if not paid within the grace period.
How do I know if the vendor is a foreign resident?
It is up to the purchaser to ascertain whether or not a vendor is a foreign resident for tax purposes.
In the case of a TARP transaction, a purchaser will not have an obligation to withhold and pay an amount to the ATO if:
- The vendor obtains a clearance certificate from the ATO declaring that the vendor is not a foreign resident; and
- The vendor provides that certificate to the purchaser before settlement.
Where the interest is another type of asset (i.e. not TARP), the purchaser can obtain a written declaration from the vendor that the vendor is not a foreign resident.
The purchaser will not have a withholding obligation in those other types of transactions if the purchaser does not know the declaration to be false.
Obtaining a clearance certificate from the ATO
An application for a clearance certificate will be able to be completed online by or for a vendor after late June 2016. Before then an application will have to be made in paper but may be submitted to the ATO by fax.
An application may be made by lawyers, or tax agents for a vendor.
The ATO has stated that conveyancers who are not legal practitioners cannot make an application for a clearance certificate for a vendor.
The ATO has stated that a clearance certificate will usually be available within a matter of days after an application is made.
Where there are data irregularities, the ATO has stated that certificates will usually be available within 14-28 days after an application is made. This might happen, for example, where the vendor’s name in the ATO records is different from the name on the certificate of title.
Where there are multiple vendors, a clearance certificate will need to be obtained from each vendor.
For how long is a clearance certificate valid?
A clearance certificate will be valid for 12 months, so the vendor can use the certificate for multiple transactions during that period.
The date that the clearance certificate is given to the purchaser must be a date within the period that the certificate is valid.
A practical approach, for a vendor who is not a foreign resident, would be to make an application for a clearance certificate as early as possible. Any difficulties then encountered in obtaining an appropriate certificate because the name of the vendor on title differs to the ATO records can be dealt with well before settlement.
While a vendor is not required to do so, a clearance certificate can be attached to a vendor’s statement or contract of sale to avoid any potential delays or difficulties at settlement regarding withholding of money by a purchaser.
Potential issues in obtaining a clearance certificate
A purchaser may correctly refuse to accept a clearance certificate if the vendor’s name in it is not identical to the vendor’s name on the title. The purchaser should then withhold 10% of the purchase price at settlement and pay that amount to the ATO
In a Clearance Certificate Application, the Vendor’s full name as it appears on the certificate of title of the property being sold is required, but if that name does not match the name in the ATO record an appropriate clearance certificate may not be issued until the discrepancy is cleared up.
A vendor’s maiden name is set out on the certificate of title, but on the ATO database, she is identified by her married name.
In those circumstances, the vendor should provide to the ATO proof of a name change (for example, a change of name certificate or marriage certificate) with the application for a clearance certificate.
Checking the validity of a clearance certificate
Even though a purchaser is not required to do so, a purchaser can check the validity of a clearance certificate via the ATO website.
In order to check the validity of a clearance certificate, a purchaser will need to provide:
- a BET number from the ‘Our reference’ field at the top of the certificate; and
- The vendor’s name as it appears on the clearance certificate.
What if the ATO withdraws a clearance certificate after it has been issued?
In rare circumstances, the ATO may withdraw a clearance certificate when it receives or becomes aware of information that indicates a clearance certificate should not have been issued.
A purchaser will not be liable for any penalty or interest where it has relied on a clearance certificate that is subsequently withdrawn, if the purchaser relied on that certificate in good faith (that is, the purchaser is unaware that the certificate has been withdrawn).
What if the clearance certificate is fraudulent?
The ATO will not penalise a purchaser if the purchaser receives a clearance certificate that appears to be genuine and valid, and in good faith relies on that document and therefore does not withhold even if it is a “forgery”.
In that case, the ATO will penalise a vendor.
How does the vendor get the money withheld?
To obtain money that has been withheld by a purchaser, a vendor will need to file a tax return with the ATO.
Money withheld at settlement and remitted to the ATO will be credited to tax payable by the vendor or refunded if there is no tax payable.
Accordingly, if a purchaser does not pay the withholding amount to the ATO, the vendor will not be entitled to receive a credit because until the purchaser has submitted a Purchaser Payment Notification Form and payment to the ATO, the ATO will not be aware of the transaction.
This presents some possible hazards for foreign resident vendors.
For example, an unscrupulous purchaser may simply not pay the relevant amount to the ATO and may abscond.
A possible solution would be for the parties to agree that the money withheld is to be held by the purchaser’s lawyer and is to be promptly remitted by that lawyer to the ATO after settlement.
How will this legislation affect mortgage-lenders?
The ATO is not permitted to place a charge on land if the mortgage-borrower/purchaser fails to withhold and remit to the ATO 10% of the price when it purchases real estate without receiving a clearance certificate. As, in that circumstance, the mortgage-borrower/purchaser will be liable for the 10% penalty plus interest if it fails to withhold and remit when required and as that liability may affect the mortgage-borrower/purchaser’s ability to meet its loan obligations, the mortgage-lender will be likely to take an active interest in the withholding aspects of purchase transactions that they finance.
Mortgage-lenders will need to anticipate that a possible 10% will be withheld at settlement by the purchaser when the property (or other relevant interest) is sold if the mortgage-borrower is or may be a foreign resident and therefore will not be available for repayment of the mortgage loan.
This is likely to affect the loan-to-value ratio that mortgage-lenders are prepared to agree to when the purchaser/borrower is a foreign resident.
Contracts of Sale
Contracts of sale made or to be made on or after 1 July 2016 are likely to contain provisions relating to the new laws.
For example, they may include conditions along the following lines:
- A condition requiring a vendor to provide a clearance certificate (where applicable) to the purchaser at least 5 days before settlement;
- A condition requiring a purchaser to provide to the vendor proof of payment to the ATO of the amount required to be withheld;
- A condition requiring money to be withheld to be paid to a lawyer who will then remit the money withheld to the ATO.
Variation of the amount to be withheld
The ATO also has the power to vary the amount to be withheld.
The amount can be reduced to zero if appropriate.
Examples of when a variation might occur include:
- Where there are multiple vendors and only one of them is a foreign resident. For example:
There are 4 vendors (each owning equal shares in the property) and only one is a foreign resident.
The purchaser is shown a clearance certificate from all 3 Australian resident vendors.
The foreign resident vendor applies for a variation to the ATO so that only 10% of their share in the property (25%) will need to be withheld by the purchaser.
The amount needed to be withheld will be 10% of 25% of the purchase price of the property sold;
- When the foreign resident will not make a capital gain (e.g. because it will make a capital loss or because it can rollover payment of CGT);
- The proceeds of the transaction are exempt from taxation (e.g. under the terms of a relevant double tax agreement);
- The foreign resident does not have to pay tax (e.g. because of tax losses from previous years); or
- The vendor is a secured creditor of a foreign resident exercising its power of sale but the proceeds from the sale are not enough to pay both the secured debt and the withholding amount.
Variation applications can be made by a vendor’s lawyer or accountant on the vendor’s behalf. Conveyancers cannot make variation applications for vendors.
When will this legislation not apply?
The laws will not apply if:
- The transaction is for TARP with a market value of less than $2 million;
- The transaction involves listed shares; or
- The asset is a membership interest (e.g. shares in a company). However, the seller must still make a declaration that the interest is not an indirect real property interest and the purchaser must not know that declaration to be false. This declaration will be valid for 6 months from the date it is signed by the vendor;
- The seller is bankrupt or under external administration;
- There are other withholding obligations in regard to the transaction.