As of 1 July 2016, a 10% non-final withholding tax applies on the disposal by vendors of certain taxable Australian property assets unless an exemption is satisfied.
What you need to know
- Purchasers will be required to withhold and pay 10 % of the total consideration of a relevant transaction to the Commissioner of Taxation (the Commissioner) in the form of a non-final withholding tax payment (Withholding Regime).
- A relevant transaction occurs where there is a disposal of taxable Australian assets.
- Although the regime applies to assets owed by relevant foreign residents, it is presumed that all vendors are foreign residents unless a clearance certificate is provided to a purchaser at or prior to settlement.
- The Withholding Regime applies to transactions entered into on or after 1 July 2016.
- The obligation to withhold and remit funds to the Australian Taxation Office (ATO) rests with the purchaser. These funds must be remitted to the ATO on or before settlement.
- A failure to remit the payment by the Purchaser is a criminal offence and may attract a
- Day of sale of the contract
- Where there is no contract involved, it is the date at which the purchaser becomes the owner of the property (i.e. date of the transfer)
- For options, it is the date of exercise of the option (not when the option was entered into)
Taxable Australian Assets
- Australian real property (including a lease of land) i.e. land, residential and commercial property
- Mining, quarrying or prospecting rights
- An indirect Australian real property interest - an interest of 10 % or more in an entity whose underlying value is primarily derived from taxable Australian real property
- Option or right to acquire such property or interest
- The money paid, or required to be paid, to acquire the asset, if the transaction is at arm's length
- Where the transaction is between related party or not at arm's length, or where there is no purchase price, it will be the market value of the property
- Where the consideration for the asset is less than $2 million. If GST is payable, this amount is exclusive of GST but only if the purchaser is registered for GST and can claim GST
- A valid clearance certificate or vendor's declaration is provided by settlement;
- Transactions listed on an approved stock exchanged
- Where existing withholding obligations apply (e.g. where a trustee has liability to pay tax under section 98 of the Income Tax Assessment Act(ITAA) 1936)
- Where the transaction arises from formal insolvency or bankruptcy proceedings
- Securities lending arrangement that do not trigger a Capital Gains Tax (CGT) liability
How do you comply?
- Vendors can apply to the ATO for a clearance certificate if the vendor satisfies the following:
- Vendor is an Australian resident and not a foreign resident for tax purposes;
- Vendor is disposing real property or an indirect real property interest.
- An application for the clearance certificate can me made online at www.ato.au/FRCGW and it can be completed by either the vendor or authorised agents (i.e. tax agent or legal representative)
- The name on the clearance certificate must match the name on the certificate of title. If there are inconsistencies between the name on the title and on ATO's records, ATO will have to manually process the application
- A clearance certificate is valid for 12 months
- A clearance certificate can be used for multiple properties by the same vendor, provided that the disposal falls within the period for which the certificate is valid.
- Where the Vendor provides a valid clearance before or at settlement, the purchaser will be released from its obligations and will not be required to withhold the requirement amount
- The general rule is an amount equal to 10% of the total consideration unless a variation request has been granted
- Variation request can be made by the vendor to ATO if:
- the vendor will not make a capital gain on the transaction (eg because theywill make a capital loss or a CGT rollover applies);
- the vendor will otherwise not have an income tax liability (eg because of carried-forward capital losses or tax losses); and
- a creditor of the vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures.
- The variation application can be submitted online
Payment to ATO
- The purchaser, or its legal representative, must complete a Purchaser Remittance Form. Once submitted, a payment reference number will be generated
- Payment must be made on or before the day the date the purchaser becomes the legal owner of the asset
- Vendor's declaration can be made where the asset being disposed is other than real property or an indirect real property interest
- There are two types of declarations:
- a declaration that the Vendor is an Australian resident for income tax purposes
- a declaration that the asset being disposed of is not an indirect Australian real property interest.
- A vendor's declaration is only valid for six months from the date it is made
The regime commenced on 1 July 2016, and applies to all relevant transactions. Vendors and purchasers must therefore speak to their legal advisor to ensure that they take appropriate action to ensure compliance with this regime.
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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.