Like a lot of tax rules, the new foreign resident CGT withholding rules (which commenced on 1 July 2016) may have wider application than first thought.
Whilst it is well known that the withholding rules can apply to disposals of land by persons who are not Australian tax residents, it is important to remember that these rules may also have application to certain transactions which involve the grant of an option or right to acquire certain Australian property interests.
In accordance with the withholding rules, the grant of an option or right to acquire Australian land (including certain mining rights) or certain Australian share interests (Australian Property) can be subject to the withholding regime if:
- the entity granting the option or right is a foreign tax resident; or
- the acquirer of the option or right reasonably believes that the grantor is a foreign tax resident or is not an Australian tax resident.
It is important to note that:
- Where the withholding regime does apply, the acquirer of the option or right must pay to the ATO 10% of the first element of the option or right’s cost base.
- Some of the carve outs from the operation of the withholding rules which apply to Australian land do not apply in the context of the grant of an option or right to acquire Australian Property. For example, the disposal of Australian land by a foreign tax resident is not subject to the withholding regime where the land has a market value of less than $2 million. This carve out does not apply to the grant of an option or right to acquire Australian Property.
- In practical terms, where a foreign tax resident is, or may be, a party to an agreement which evidences the grant of an option or right to acquire Australian Property, it is imperative that the agreement contains an appropriately drafted clause which deals with the rights and obligations of the parties in respect of the withholding regime.
In the absence of an appropriately drafted clause, disputes between the grantor and the grantee may arise, particularly if the grantee wishes to comply with their withholding obligations by withholding the appropriate amount from the consideration payable for the grant of the option or right.
If you have any questions about this article, or require specific advice, please contact us.