With effect from 1 July 2016, purchasers who purchase Australian assets with a market value of at least $2 million ("Target Assets") from foreign residents must withhold an amount equal to 10% of the purchase price. The Target Assets include:
- all real property such as land, buildings, residential and commercial property, and including leases;
- mining, quarrying or prospecting rights;
- indirect interests in Australian entities whose major assets consist of real property; and
- options or rights to acquire any of the above.
It is currently unclear if the purchase price of the options or rights to acquire, and which are by themselves worth less than $2 million, are exempt.
The amount withheld by the purchaser must be remitted to the Australian Tax Office (“ATO”). Failure to remit the amount is a criminal offence and may attract a penalty. Failure to withhold the required amount may also attract an administrative penalty equal to the amount required to be withheld.
Who is a foreign resident?
All vendors of Target Assets will be deemed to be foreign residents under the new regime. A vendor is also taken to be a “foreign resident” if a purchaser:
- knows or reasonably believes that the vendor is a foreign resident; or
- does not reasonably believe that the vendor is an Australian resident, and the purchaser:
- has a record showing the vendor has an address outside Australia; or
- is authorised to provide a related financial benefit to a place outside Australia.
Examples may include where a vendor lists an address outside Australia in the contract of sale or directs that settlement proceeds be paid into an offshore bank account.
Purchasers should assume that a vendor is a foreign resident if the vendor has not provided them with a Clearance Certificate or Vendor Declaration before settlement.
Clearance Certificates and Vendor Declarations
If the Target Asset is real property or an indirect real property interest, an Australian resident vendor may receive the full amount of the purchase price at settlement only if the Australian resident vendor has provided the purchaser with a Clearance Certificate before settlement.
If the Target Asset is other than real property or an indirect real property interest, a vendor may receive the full amount of the purchase price at settlement only if the vendor has provided the purchaser with a Vendor Declaration. However, a purchaser may not rely on the Vendor Declaration if the purchaser knows that the Vendor Declaration is false.
How to obtain a Clearance Certificate
To procure a Clearance Certificate, an Australian resident vendor must provide the ATO with the vendor’s tax file number, residency status and details of the acquisition (such as title details and transaction dates).
The Clearance Certificate will confirm a vendor’s Australian residency status and that an amount does not need to be withheld from the purchase price. A vendor may apply for a Clearance Certificate at any time prior to selling. Applications must be made online.
The ATO has advised that most certificates will be granted “within days” for straightforward cases. More complicated cases will be assigned to a case office and may take between 14 to 28 days to be assessed.
Vendor Declarations are made and provided by the vendors themselves.
There are two types of Vendor Declarations:
- a declaration that the vendor is an Australian resident; and
- a declaration that the asset being disposed of is not an indirect Australian real property interest.
There is presently no approved form for Vendor Declarations. It is also not clear at this stage as to whether the Vendor Declarations must take the form of statutory declarations. However, the ATO has advised that templates will be available from the ATO website from 1 July 2016.
A Vendor Declaration is only valid for 6 months from the date it is made.
Foreign resident vendors can apply for a variation
Foreign resident vendors are not entitled to obtain a Clearance Certificate from the ATO and there are penalties for providing a false or misleading Vendor Declaration.
However, foreign resident vendors may apply for a variation requesting a lower withholding rate be applied to the transaction. This may include a variation to nil. Circumstances where a variation may be requested include where a foreign resident vendor will not make a capital gain on the disposition. The vendor must provide relevant evidence substantiating their claims and the ATO will assess such applications on a case-by-case basis.
Next steps for purchasers
- Ensure that your transaction documents oblige the vendor to provide the purchaser with a Clearance Certificate or Vendor Declaration (if applicable), and that they are provided before settlement.
- Consider including an indemnity for loss or claims that may arise if the vendor provides false statements or fails to comply with the withholding regime.