On 3 December 2015, the Australian Government introduced a Bill into Parliament imposing a 10 per cent non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property. If the Bill is passed into law, it will apply to contracts entered into on or after 1 July 2016.
According to the Explanatory Memorandum accompanying the Bill, '[t]he purpose of the regime is to assist in the collection of foreign residents' capital gains tax (CGT) liabilities.'
This new obligation is simple. Where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and pay to the Australian Taxation Office (ATO) 10 per cent of the proceeds from the sale.
However, the practical effect can be devastating. For example, you may find yourself in a situation where you paid the foreign resident vendor the total purchase price and then having to pay the ATO an additional 10 per cent of the purchase price as well. In effect, you would have paid 110 per cent of the purchase price.
If you take the view that 'I'm not a foreign resident, it does not apply to me', you might be in for a rude shock. This new obligation to withhold payment applies to everyone who contracts to buy certain taxable Australian property.
What kind of assets will be affected?
The obligation to withhold arises on the sale of certain taxable Australian property, being:
- real property in Australia – land, buildings, residential and commercial property
- mining, quarrying or prospecting rights
- interests in Australian entities that predominantly have such assets; or
- an option or right to acquire such property or such an interest.
The Bill excludes certain transactions from the scope of the withholding regime where the 10 per cent withholding is not applicable:
- real property transactions valued under $2 million
- transactions on an approved stock exchange
- an arrangement that is already subject to an existing withholding obligation
- a securities lending arrangement; or
- the foreign resident vendor is under external administration or in bankruptcy.
Who is a foreign resident vendor?
Once you determine that the asset that you are buying is within the withholding regime, the starting premise is that you have to treat all vendors as a foreign resident vendor.
Whether you are relieved from the obligation to withhold and pay the ATO depends on what you are buying.
If you are buying Australian real property, Australian mining, quarrying or prospecting rights or company title interest being shares in a company that owns Australian real property, you are relieved from your obligation to withhold and pay the ATO if the vendor provides you with a clearance certificate (which is discussed further below).
If you are buying indirect Australian real property interests (other than company title interest) or options and rights to acquire taxable Australian real property or indirect Australian real property interests, you are relieved from your obligation to withhold and pay the ATO if:
- the vendor has provided a residency declaration and you do not know the declaration to be false; or
- you do not know or have reasonable grounds to believe that the vendor is a foreign resident.
The Bill allows a vendor to apply for a clearance certificate from the ATO which confirms that the withholding tax is not to be withheld from the transaction. The vendor must provide the clearance certificate to the purchaser on or before settlement otherwise the purchaser is required to withhold 10% of the purchase price.
It is important to note that even Australian resident vendor has to apply for a clearance certificate to ensure that no funds are withheld from the sale proceeds.
When and how to apply?
A vendor may apply for a clearance certificate at any time at which they are considering the disposal of the relevant assets. This can be before the asset is listed for sale and is valid for 12 months.
The vendor or its agent has to complete an online application form and the ATO will check all the information on the application. The ATO anticipates that clearance certificates will be provided between 1 day to 14 days. However if there are data irregularities, exceptions, higher risk and unusual cases it may take even longer.
There is currently no indication if there will be a fee to apply for the clearance certificate.
The proposed withholding regime also allows a party to submit a variation request with the ATO to withhold a lesser amount. The ATO believes that if it has all the required information, it will be able to provide the variation within 28 days. The form for this request will be made available on the ATO website once this becomes law.
The vendor must show the notice of variation to you by settlement.
If you fail to withhold and pay the ATO when you are obligated to under the proposed law, the penalty is equal to the amount that was required to be withheld and paid.
Given the wide ranging application of this Bill, it is important for everyone to be aware of its existence. We will provide an update as this Bill progresses through Parliament.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.