The Tax and Superannuation Laws Amendment (2015) Measures No 6 Bill, assented to on 25 February 2016, introduced a 10% non-final withholding tax on the disposal, by foreign residents, of certain taxable Australian property. The newly introduced measure, set to take effect from 1 July 2016, has far reaching implications. It will affect both vendors and purchasers of certain Australian assets including Australian resident vendors. It is important that affected persons understand the implications of the new requirements and take appropriate steps and introduce suitable measures to minimise exposure and risk and ensure compliance with the law. Senior Associate, Kimberley Levi discuss further.
Background - CGT for foreign residents
The capital gains tax (CGT) rules operate to disregard a capital gain or capital loss made by a foreign resident unless the relevant CGT asset is “taxable Australian property.” If the capital gain is in relation to “taxable Australian property,” the foreign resident must lodge a tax return and assessments proceed in the usual course.
The Australian Taxation Office considers voluntary compliance with this requirement to be extremely low. In response to this, on 6 November 2013 the Federal Government announced that it would introduce new measures to assist in the collection of such tax. The recently introduced measures are in response to that announcement.
The 10% non-final withholding tax
From 1 July 2016, broadly, a purchaser must pay an amount to the Commissioner and may withhold the same amount from the payment made to the vendor, if:
- the purchaser purchases a relevant Australian asset;
- the vendor is a relevant foreign resident; and
- the acquisition is not an excluded transaction.
Each of the above conditions, the amount to be paid to the Commissioner, and the implications both for vendors and purchasers is explained in further detail below.
Relevant Australian assets
The new regime applies to an acquisition of a relevant Australian asset, being:
- taxable Australian real property;
- an indirect Australian real property interest; or
- an option or right to acquire the above property or interest.
Taxable Australian real property is real property situated in Australia, including a lease of real property situated in Australia, or a mining, quarrying or prospecting right (to the extent that the right is not real property) if the minerals, petroleum or quarry materials are situated in Australia.
An indirect Australian real property interest includes a non-portfolio interest, being an interest of 10 per cent or more, in an entity whose underlying value is principally derived from taxable Australian real property (for example, an interest of 10 per cent or more in a company title interest).
Relevant foreign residents
The new measure will only apply to acquisitions from a relevant foreign resident. However, as explained below, in certain circumstances the presumption is that the vendor is a foreign resident, unless various requirements are satisfied. The threshold requirements for determining whether a vendor is a relevant foreign resident differs depending on what CGT asset is being acquired.
If the CGT asset to which the transaction relates is taxable Australian real property or an indirect Australian real property interest the holding of which causes company title interest to arise, the vendor is a relevant foreign resident unless the vendor has given the purchaser a clearance certificate certifying that the entity is not a relevant foreign resident for the purpose of these measures.
If the CGT asset to which the transaction relates is any other relevant Australian asset, unless the vendor provides the purchaser with a residence or interest declaration which the purchaser does not know to be false, the vendor is a relevant foreign resident if:
- the purchaser knows that the vendor is a foreign resident;
- the vendor reasonably believes that the vendor is a foreign resident;
- the vendor does not reasonably believe that the vendor is an Australian resident and either, the vendor has an address outside Australia, or the purchaser is authorised to provide a related financial benefit to a place outside Australia; or
- the vendor has a connection outside of Australia of a specified kind.
A vendor who is not entitled to a clearance certificate or to make a declaration, however who still believes a 10% withholding is not appropriate, may apply for a variation notice from the Commissioner, varying the amount of withholding.
The following transactions are excluded from the new regime:
acquisitions of Taxable Australian real property that has a market value of less than $2,000,000;
- acquisitions of shares in a company title interest (being indirect real property), where the relevant interest is less than $2,000,000;
- acquisitions through on-market transactions conducted on an approved stock exchange;
- transactions conducted using a broker-operated crossing system, being a system that enables trading off-market;
- transactions to which other withholding obligations apply;
- securities lending arrangements that are eligible for roll-over relief; and
- disposals where the foreign resident is a company under external administration at the time of the transaction, or where the foreign resident is an individual and the transaction arises from the administration of a bankruptcy estate, a composition or scheme of arrangement, a debt arrangement, a personal insolvency arrangement, or same or similar circumstances under foreign law.
Paying the amount to the Commissioner
The purchaser must pay to the Commissioner an amount equal to 10 per cent of the first element of the cost base of the CGT asset just after the transaction. Generally, this will be the purchase price, being the total consideration paid or to be paid, including the market value of any property given in respect of acquiring the CGT asset.
The amount paid to the Commissioner is not a final tax. Instead, the amount will be credited against the foreign resident’s Australian tax liability once a tax return has been lodged. Whilst there is no obligation to withhold as such, the obligation to pay the amount to the Commissioner is described as a withholding obligation because the payment amount may be withheld from the vendor.
The relevant amounts must be paid on or before the day the purchaser becomes the owner of the CGT asset.
Implications for Australian resident and foreign resident vendors
The new measures have clear implications for foreign resident vendors. Foreign resident vendors selling relevant Australian assets should be aware of the purchaser’s rights to withhold the relevant amount from payment to the vendor. Foreign resident vendors should also consider whether they would be eligible for a variation to the withholding amount.
The new regime also has implications for Australian resident vendors. To avoid the withholding, Australian resident vendors selling taxable Australian real property, or an indirect Australian real property interest the holding of which causes company title interest to arise, with a market value of $2,000,000 or more, must apply for a clearance certificate from the Australian Taxation Office to prevent the purchaser from withholding.
The Australian Taxation Office is implementing an automated process for issuing clearance certificates, which can be applied for by a vendor, or a vendor’s agent online. The certificates may be applied for at any time and are expected to be valid for 12 months. Whilst the Australian Taxation Office has announced that, in straightforward cases, the clearance certificates are expected to be provided within days of receipt of an application, applications requiring manual processing may take 14-28 days, and high risk and unusual cases may take even longer. It is therefore important to apply for the clearance certificate promptly.
Australian resident vendors selling other relevant Australian assets should similarly consider preparing a residence or interest declaration in a timely manner.
It would be prudent for Australian resident vendors to include a clause in the relevant transaction documents regarding the receipt of a clearance certificate, or including a declaration as to residency.
Implications for purchasers
If a purchaser is acquiring taxable Australian real property, or an indirect Australian real property interest the holding of which causes company title interest to arise, with a market value of $2,000,000 or more, the purchaser must either obtain a clearance certificate from the vendor, or pay the prescribed amount to the Commissioner.
For purchasers of other relevant Australian assets, it is important for purchasers to consider whether they have reason to believe that a vendor is a foreign resident, and if so, for appropriate steps to be taken.