Australia: Foreign resident capital gains tax withholding made simple

Last Updated: 27 July 2016
Article by Mark Friezer

Most Read Contributor in Australia, August 2016

Australian property vendors should apply online to the ATO to get a clearance certificate immediately a sale of relevant property is contemplated.

The new foreign resident capital gains tax withholding regime is now in force.

This is an important and pervasive measure which impacts upon purchasers of property but is also relevant for purchasers of shares in non-listed property rich companies and purchases of units in unlisted property trusts.

Property is broadly defined and includes both residential and commercial real property, leasehold interests and mining, quarrying and prospecting rights.

Property acquisitions

There is a very simple rule - if you are a purchaser of property for more than $2 million then you must withhold unless the vendor shows you a clearance certificate or a variation certificate. An exemption is available where the vendor is in financial distress as defined (eg. administration) but specific advice should be obtained in such cases.

There has been some controversy as to the period of currency of the clearance certificate. The legislation prescribes that the clearance certificate should be valid for a period which covers the date of contract. It should also be valid at the date it is provided to the purchaser. However, the ATO says that at the moment they can't issue a retrospective clearance. This is relevant where the clearance certificate is applied for after the date of contract. Apparently, at some point in the next six months the ATO will be able to issue retrospective certificates, but for the time being it will accept a clearance certificate if it is current when given to the buyer and it predates the settlement date.

The practical advice for any Australian Vendor of property is that they should apply online to the ATO to get a clearance certificate immediately a sale of relevant property is contemplated. The clearance certificate is not property specific and lasts 12 months. If the vendor commonly sells properties it would be sensible to apply online and simply renew every 12 months. If a corporate group sells properties out of different entities each separate entity should apply - even if the group is consolidated for tax purposes.

Foreign vendors may apply to the ATO for a variation on the grounds that the tax they expect to pay on the gain (if any) will ultimately amount to less than 10% of the purchase price. The effect of the variation may be to reduce the withholding required to nil or some other amount. This might be the case, for example, where the property is being sold for a loss, the vendor has carried forward tax losses or roll-over relief is available. Unlike the clearance certificate the variation is property specific and may take up to a month to obtain - so should be applied for as early in the sale process as possible.

This is a non-final withholding measure. This means that the foreign vendor should file an Australian tax return disclosing any gain. The amount withheld by the purchaser is a tax credit to the amount otherwise payable by the vendor - so even if withholding is made where the Vendor has no tax liability, the vendor be entitled to a full refund on filing an Australian tax return.

If the purchaser fails to withhold then the ATO can potentially impose a penalty of the amount of tax which would should have been withheld. Given that the rules only apply to properties to the value of over $2 million then this would be at a minimum $200,000.

Acquisitions of shares or units in property rich companies

Purchasers of shares or units might also have to withhold - but the procedure in order to escape withholding is different. There is a declaration mechanism that can be used by both Australian and foreign vendors.

The clearance certificate is not relevant. There is no need to approach the ATO. The vendor should give the purchaser a declaration that either the vendor is an Australian resident or in the case of a foreign resident , that the shares or units that the vendor holds do not amount to an indirect interest in property. An indirect interest requires a holding of 10% or more in an entity the value of assets of which principally comprise Australian property. There is no need to withhold where the transaction occurs on an approved stock exchange.

The withholding rules can also apply to options and so there is withholding on any premium paid to acquire an option over property.

In each of these instances the $2 million threshold which applies for direct property interest is not applicable.

As is the case with a clearance certificate the production of a declaration by the vendor automatically alleviates any requirement on the purchaser to withhold. However, it is possible to avoid withholding on the sale of an indirect interest test, where there are reasonable grounds to believe the Vendor is an Australian resident. Given the stiff penalties which may be imposed by the ATO for failure on a purchaser for failure to withhold, extreme caution should be used where the knowledge exception is sought to be relied on.

As is the case for direct property sales a variation can be applied for by the vendor to reduce the withholding rate.

The not so simple bits

Those are the basic principles - but there are a lot of subtleties of the rules, for example, multiple vendors, multiple purchasers, non-cash transactions, intra-group transfers of property, mortgagee sales, fraudulently obtained certificates, lapsed certificates and so on.

If you still have any questions about the detail, you can first get nine common questions answered here, but we'd suggest specific advice should be obtained in non-vanilla situations.

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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.

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