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The Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015 received Royal Assent on 25 February 2016. Effective 1 July 2016, the legislation introduces a new foreign capital gains withholding tax regime that will assist the Australian Taxation Office (ATO) collect foreign residents’ Australian tax liabilities arising from the sale of property.
Clearance certificates, which are valid for 12 months, can be obtained by application to the ATO, and verify that the vendor is a resident or has been exempted from the withholding tax. With an aim to provide purchasers certainty regarding their withholding obligations, the certificate must be provided by the vendor on all transactions involving taxable Australian real property and company title interests.
In straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within 1–14 days. A non-resident or temporary resident cannot obtain an ATO certificate; therefore, the purchaser will be required to withhold 10 per cent of the sale price.
Where a clearance certificate is not provided by the time of settlement, the purchaser must register and withhold 10 per cent of the proceeds and forward this amount to the ATO on settlement. Prior to this, a Purchaser Payment Notification form must be lodged with the ATO to obtain the details required to make the payment. The penalty for a purchaser failing to withhold is equal to the amount that was required to be withheld and paid.
In the event that withholding tax has been paid to the ATO, the foreign vendor will need to lodge an Australian tax return for the relevant year to make a claim for the withheld funds. The 10 per cent withholding tax credit will be offset against any applicable tax payable by the non-resident and either a top tax or a refund will apply at the time of assessment.
Different requirements will apply for transactions involving Other Assets such as shares, units and options. Australian-resident vendors are able to provide a signed Residency Declaration instead of supplying a clearance certificate, and penalties will be imposed for false and misleading declarations.
Those with foreign interests in their ownership structure are advised to resolve the clearance certificate eligibility or residency declarations (where relevant) before any sale transactions are progressed on the asset classes above.
The new withholding regime will not apply to:
Where a vendor is not eligible to obtain a clearance certificate because of their residency status, they can apply to the ATO for a variation to the 10 per cent withholding tax in certain circumstances.
A variation may be granted where the vendor can show that they will not make a capital gain on the disposal (either through a capital loss outcome or eligibility for CGT rollovers) or there are carry-forward losses available to negate any tax liability.
Other circumstances where the ATO may consider a variation include where a vendor has a mortgage security on the property and deduction of the 10 per cent WHT would mean a shortfall of funds to discharge the security, or where there are multiple vendors and only one is a non-resident.
An application for variation will be required in the approved form from the vendor and the ATO has indicated these may take up to 28 days to process. The ATO will then issue a notice of variation stating the revised amount to be withheld (or none). The notice should be supplied to the purchaser prior to settlement.
The scope of the provisions appears to be wider than expected, with the following scenarios presenting potential unintended consequences that call for a cautious approach.
It is hoped that the ATO will provide further guidelines regarding how it plans to administer the rules, to afford practitioners certainty regarding these various scenarios and allow them to plan processes accordingly.
Next article: Understanding the GST implications of contracts of sale.
