The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 (Act) was passed by Parliament and received Royal Assent on 25 February 2016.
The Act introduced a new foreign resident capital gains tax withholding (Withholding Tax) regime to all contracts for sale of Australian property which is entered into on or after 1 July 2016.
In summary, where the market value of the property is $2 million or more, the Purchaser of certain taxable Australian assets from a foreign resident is required to withhold and remit 10% of the total consideration to the Commissioner of Taxation.
The Purchaser is obliged to comply with a Withholding Tax (even if the Vendor is not a foreign resident) unless the Vendor supplies a clearance certificate from the Australian Taxation Office (ATO).
Assets Affected
The Withholding Tax applies to the following assets:
- Real property in Australia with a market value of $2 million or more including:
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- land, buildings, residential and commercial property;
- Lease over real property in Australia;
- Mining, quarrying or prospecting rights,
(Australian Real Property)
- Other assets including:
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- Interests in Australian entities whose majority assets consist of the above asset types; and
- Options or rights to acquire any of the above asset types.
The Withholding Tax does not apply to:
- Real property transactions with a market value under $2 million
- Transactions listed on an approved stock exchange; and
- The foreign resident Vendor who is under external administration or in bankruptcy.
Exceptions
The Withholding Tax does not apply when the Vendor disposes of either:
- an Australian Real Property and provides the Purchaser with a clearance certificate from the ATO; or
- any other asset (other than Australian Real Property) where the Purchaser is given a Vendor declaration:
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- as to the Vendor's Australian tax residency; and
- confirming that interest being disposed of in an Australian entity is not an indirect Australian Real Property interest.
The Purchaser can rely on the declarations unless they know the declaration is false. Penalties apply where the Vendor has knowingly, recklessly or failed to take reasonable care in making a false or misleading declaration.
Clearance Certificate
To provide certainty to the Purchasers regarding the withholding obligations, Vendors of the Australian Real Property can apply and obtain from the ATO a clearance certificate prior to settlement of the transaction. If the Vendor fails to provide the certificate by settlement, the Purchaser would be required to withhold 10% of the purchase price and pay this to the ATO.
The Vendor may apply for a clearance certificate at any time they are considering the disposal of real property. This can be before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the Purchaser prior to settlement.
The ATO is implementing an automated process for issuing a clearance certificate. Vendors should complete an online clearance certificate application form via the following link:
If there are data irregularities or exceptions, some manual processing may be required and the clearance certificate will normally be provided within 14 – 28 days (or longer for higher risk and unusual cases).
How this works in practice
Where the Withholding Tax applies, the Purchaser is required to complete an online 'Purchaser Payment Notification' form with the ATO to provide details of the Vendor, the Purchaser and the asset being acquired.
The Purchaser will then receive a payment reference number, and a payment slip which includes a barcode for use if paying in person at Australia Post. The Purchaser needs to pay the withholding tax on or before settlement. The Purchaser can choose to pay the withheld amount by electronic funds transfer, at a post office with the barcode or they can mail a cheque to the ATO with the payment reference number. General interest charge may apply to late payments to the ATO.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
