The Federal Government intends the CGT Withholding Regime to apply from 1 July 2016.
If legislation currently before the Commonwealth Parliament passes, from 1 July 2016 a purchaser of Australian land or an interest in Australian land may be required to withhold 10% of the purchase price on account of the vendor's potential Capital Gains Tax (CGT) liability and to pay this amount to the Australian Taxation Office (ATO). Significant penalties will apply for a purchaser's failure to do so.
New CGT withholding regime
The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 proposes to introduce a new non-final withholding tax regime to assist in the collection of CGT from foreign residents. Although this new regime has been publicised as targeting foreign resident vendors, it will impact all vendors and purchasers of Australian land.
A natural person is a foreign resident if he or she is not domiciled in Australia or has not actually been in Australia, continuously or intermittently, for more than half of the financial year prior to the sale. A company is a foreign resident if it is not incorporated in Australia, unless it carries on business in Australia and either has its central management and control in Australia or has its voting power controlled by shareholders who are residents of Australia.
Unless an exception applies, where parties enter into a contract on or after 1 July 2016 to sell, transfer or assign:
- any interest in Australian land (including a lease of Australian land);
- a mining, quarrying or prospecting right in relation to resources situated in Australia;
- a 10% or more interest in an Australian entity that predominantly holds any of the above assets (Land Company); or
- an option to acquire any of the above,
the purchaser will be required to withhold 10% of the purchase price (CGT Amount) at settlement on account of the vendor's potential CGT liability and pay the CGT Amount to the ATO (CGT Withholding Regime). The purchase price excludes adjustments but includes:
- the market value of any non-monetary consideration to be given to the vendor; and
- GST, if the purchaser is not entitled to an input tax credit for GST paid.
The CGT Withholding Regime will, as a default position, therefore also apply where an Australian resident vendor sells any of the assets listed above, unless an exception is satisfied.
Where there are multiple vendors, the CGT Withholding Regime may arise if and to the extent that any of the vendors is a foreign resident.
Exceptions to the CGT withholding regime
A purchaser's obligation to withhold a CGT Amount from a vendor (whether a foreign or Australian resident) at settlement will not apply if any of the following exceptions is satisfied:
- in relation to an asset other than an option or an interest in a Land Company that does not create a company title (ie. a right to occupy land arising by virtue of holding shares in the company that owns the land):
- the market value of the asset is less than $2 million (Threshold Exception) (this exception is designed to exclude the majority of residential sales); or
- a clearance certificate has been obtained from the ATO by the vendor and provided to the purchaser on or before settlement (Clearance Certificate Exception); or
- in relation to an option or an interest in a Land Company that does not create a company title:
- the vendor gives the purchaser a declaration that the vendor is or will be an Australian resident for a period which covers the transaction and the purchaser does not know that the declaration is false (Declaration Exception); or
- the purchaser does not positively know and does not reasonably believe that the vendor is a foreign resident (Knowledge Exception); or
- the transaction is conducted through an approved stock exchange or crossing system; or
- the transaction is a securities lending arrangement; or
- an amount is already required to be withheld as withholding tax for some other reason; or
- the vendor is under external administration or in bankruptcy.
Unless the Threshold Exception or one of the exceptions in items 3 to 6 above applies, where a vendor (including an Australian resident vendor) sells an interest in Australian land, a mining right or an interest in a Land Company which creates a company title, to avoid having to withhold a CGT Amount, the vendor must:
- obtain a clearance certificate; and
- provide the clearance certificate to the purchaser on or before settlement.
Applications for clearance certificates will need to be made to the ATO. Certificates will issue if, based on information before the Commissioner of Taxation, there is nothing to suggest that the vendor is or will be a foreign resident during a specified period.
As a clearance certificate is valid for 12 months, it may be obtained before a vendor begins any marketing activities. The ATO proposes to implement an automated process for issuing clearance certificates and expects that it will take up to 14 days for a clearance certificate to issue.
Where a purchaser of an option or an interest in a Land Company which does not create a company title is unsure about whether a vendor is a foreign resident, the purchaser may request the vendor to make a declaration confirming its residency in order to rely on the Declaration Exception. The Threshold Exception and the Clearance Certificate Exception are not available in these circumstances.
A vendor may declare in writing that for a specified period (no longer than six months after the declaration is made), he she or it is and will be an Australian resident. Such a declaration may be inserted into a contract as a warranty. A purchaser is entitled to rely upon such a declaration provided that it does not know the declaration to be false.
Importantly, it is a purchaser's obligation to withhold the CGT Amount where none of the exceptions apply. A purchaser will be required to complete a "Purchaser Remittance Form" and submit it to the ATO together with the CGT Amount. If the purchaser fails to withhold a CGT Amount where it is required to do so, the purchaser may be subject to a penalty equal to the CGT Amount which should have been withheld.
Variation of the CGT Amount
Where it is not appropriate to withhold 10% of the purchase price, a variation request may be made to the ATO for a lesser percentage to be used in calculating the CGT Amount. A variation request may be made by the foreign resident vendor, the purchaser or a creditor of the foreign resident vendor.
The ATO may agree to reduce the CGT Amount to nil. In determining whether to allow a requested variation, the ATO will consider whether:
- such variation is required to protect a creditor's right to recover a debt from the foreign resident vendor;
- the foreign resident vendor will not make a capital gain on the transaction;
- the foreign resident vendor will otherwise not have an income tax liability; or
- there are multiple vendors, only one of which is a foreign resident.
This article is based on the version of the Bill current as at the date of its publication. Further amendments to the Bill may be made before it is passed.
Clayton Utz can assist with any queries you may have in relation to the foreshadowed introduction of the new CGT Withholding Regime and the impact this will have on your business and other activities.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.