Australia: Foreign resident capital gains withholding provisions (FRCGW) and the insolvency arena

WHO SHOULD READ THIS

  • Insolvency practitioners, mortgagees or other secured creditors and their advisors.

THINGS YOU NEED TO KNOW

  • Whilst the foreign resident capital gains withholding provisions (FRCGW) contain insolvency exceptions that exclude most asset disposal transactions undertaken in the insolvency area, it is important to recognise that not all insolvency transactions are excluded. Transactions by a mortgagee in possession may not be excluded.

WHAT YOU NEED TO DO

  • Determine whether the FRCGW applies to your asset disposal, and if it does, engage with the ATO early to ensure that the withholding is managed appropriately.

The foreign resident capital gains withholding provisions (FRCGW) came into effect from 1 July 2016 and have changed the procedural way that disposals of Australian real estate are carried out.

Broadly, the FRCGW requires a purchaser who acquires certain Australian real estate assets from a foreign resident vendor to withhold and remit to the Australian Taxation Office (ATO) 10% of the market value purchase price paid. The FRCGW is a non-final withholding tax as a foreign vendor must still lodge an Australian income tax return in relation to the capital gain made on the disposal and may claim credit for the FRCGW already remitted to the ATO.

The FRCGW was enacted as a response to a concern that foreign residents may not be properly paying Australian income tax on capital gains they make on the sale of Australian real estate assets. However, the breadth of the FRCGW is wide. The provisions cover more than just Australian land and can apply to a 10% or more interest held in a company or unit trust whose majority of assets, by market value, comprises Australian land. Additionally, the FRCGW can adversely apply to an Australian resident vendor of Australian land who fails to obtain clearance certificate by settlement.

In this Focus Alert we explore briefly the operation of the FRCGW in the insolvency arena. Whilst the FRCGW contain exceptions for many insolvency transactions, the exceptions are not a blanket exception. Mortgagees in possession sales are not excluded. In such situations it is critical to work out how the FRCGW may apply to the transaction and whether certain actions can be taken to avoid FRCGW. Otherwise there is a risk that the purchaser may withhold and remit 10% of the purchase price to the ATO.

In situations of uncertainty a purchaser would prefer to withhold and remit as:

  • the purchaser is liable to pay a penalty equal to the amount which should have been withheld, if they are wrong in their assessment of FRCGW, and
  • there is a statutory provision which deems a purchaser to have paid the purchase price to the extent that the purchaser has withheld and remitted an amount of FRCGW to the ATO.

If FRCGW is imposed on a transaction when it should not have been (e.g. the vendor was actually an Australian tax resident) it is possible to seek a refund from the ATO. However, the process of obtaining such a refund is involved and time consuming. In the insolvency arena where the timing of payments to secured creditors is important (a secured creditor would want payment as a condition of their release of their security), ensuring that the FRCGW is appropriately managed can be critical to the final pay out amount received by a secured creditor.

What assets are caught by the FRCGW?

The FRCGW applies to:

  • taxable Australian real property (TARP) i.e.:
    • Australian land (including a lease of land)
    • mining, quarrying or prospecting rights over minerals, petroleum or quarry materials situated in Australia
  • an 'indirect Australian real property interest', or
  • an option or right to acquire the property outlined above or an interest in such property.

A vendor holds an 'indirect Australian real property interest' if, at the relevant time (i.e. at contract settlement), they hold either alone or with associates:

  • a 10% or more direct interest in a company or trust whose majority of assets, by market value, comprise TARP at the relevant time, or
  • in a 12 month period within 24 months before the relevant time, an interest which formed part of a 10% or more direct interest in a company or trust and at the relevant time the company or trust had a majority of assets, by market value, comprising TARP.

Besides the Australian land sales, common transactions potentially caught by the FRCGW include the grant of options over TARP and the off market purchase of shares and units in companies and trusts whose majority of value comprises Australian land. Significantly, the ATO takes the approach that the FRCGW can apply to any change in legal title to an asset covered by the FRCGW. Whilst the technical correctness of the ATO's approach is debatable its position means that transfers of assets on a change of trustee may be subject to FRCGW.

What transactions are specifically excluded from the FRCGW?

Transactions which are excluded from the FRCGW include:

  • transactions involving TARP or a company title interest where the market value of the property is less than $2 million
  • a transaction on an approved stock exchange or conducted using a crossing system
  • an arrangement which is already subject to an existing withholding tax obligation
  • securities lending arrangements, and
  • transactions involving vendors who are subject to formal bankruptcy or insolvency arrangements – whether in Australia or overseas.

The insolvency exceptions to FRCGW are more specifically as follows.

Under section 14-215(1)(g), Schedule 1 to the Taxation Administration Act 1953 (Cth) (TAA) a transfer which arises from any of the following is excluded from the FRCGW:

  • the administration of the estate of a bankrupt
  • a composition or scheme of arrangement under Division 6, Part IV of the Bankruptcy Act 1966 (Cth) (BA)
  • a debt agreement under Part IX of the BA
  • a personal insolvency agreement under Part X of the BA, or
  • circumstances that are, under a foreign law, the same or similar to those in any of the above situations.

Under section 14-215(1)(f), Schedule 1 to the TAA if the foreign resident vendor is a company and at the time of the transaction any of the following applies, then the transaction is excluded from the FRCGW:

  • any of the conditions in section 161A(1)(a) CA are satisfied in respect of the foreign resident vendor, i.e.:
    • the company is being wound up
    • the company is under administration
    • the company has executed a deed of company arrangement that has not yet terminated
    • there is a managing controller of property of the company, or
    • there is a receiver of property of the company, or
  • the foreign resident vendor is, under a foreign law, in the same or similar position as outlined in the above situations.

Companies whose assets are subject to a mortgagee in possession arrangement may not necessarily be excluded from FRCGW since there may be no managing controller. Consider the situation were a mortgagee has taken possession of a passive rental property which is managed by an external real estate agent. In that situation, whilst the mortgagee's agent is a controller they carry out no management activities and consequently the company has no managing controller. A sale of such a rental property would not be excluded from FRCGW. A mortgagee in possession may be excluded from FRCGW if it does undertake management activities such that it is classed as a managing controller.

Who is a foreign resident vendor for the purposes of the FRCGW?

FRCGW only applies to a transaction where the vendor is 'foreign'. The question of whether a vendor is an Australian resident for income tax purposes is a question of fact based on weighing up a number of relevant factors. Since it is often difficult (if not impossible) for a purchaser to determine a vendor's income tax residency since they require information that only the vendor would know, the FRCGW outlines special rules to determine residency.

TARP and company title (occupancy) shares – clearance certificates

A vendor of TARP and company title (occupancy) shares will be regarded as Australian residents if the vendor does not provide an ATO issued clearance certificate to the purchaser by settlement of the transaction. The clearance certificate represents the ATO's assessment of whether the vendor is a resident for Australian income tax purposes based on its records and publicly available information. The clearance certificate assessment is only relevant for FRCGW and no other tax purpose.

Where a vendor does not provide such a clearance certificate, they are deemed to be foreign for the purposes of the FRCGW. This is so even if the vendor is actually an Australian income tax resident. The consequence of this deeming is that it is now standard conveyancing practice for an Australian resident vendor's solicitor to order a clearance certificate as part of the initial standard searches used to compile the sale contract.

In the insolvency context it is relevant to note that only the legal title owner can apply for a clearance certificate. This can be problematic for mortgagees who choose not to take the legal title to the property, but instead either direct the mortgagor to sell the property or take possession of the property to sell under a power of sale. In such situations only the mortgagor (being the legal title owner) can apply for a clearance certificate and such a mortgagor may not be very co-operative in providing the mortgagee such assistance. Mortgagees in these circumstances are more likely to manage their FRCGW obligations by applying for a variation notice (see discussion below).

Indirect Australian real property interests (other than company title or occupancy shares) – declarations

A vendor of indirect Australian real property interests (other than company title or occupancy shares) can avoid FRCGW if it makes a written declaration that either:

  • it is an Australian resident for Australian income tax purposes, or
  • the shares or units being sold are not indirect Australian real property interests.

A purchaser can rely on such a declaration provided they do not know that the declaration is false.

It can be difficult to assess whether or not the shares or units being sold are indirect Australian real property interests, since it depends on relative market values of real estate owned by the relevant company or trust. Consequently, it is more common in practice for a vendor to make an Australian residency declaration.

Since a written declaration only lasts 6 months the general contractual practice is to require a vendor to make such a declaration both at the time of exchange and then at completion to ensure that the declaration still applies.

Variation notices

The ATO has the power to vary the amount of FRCGW payable (this can be to nil) by issuing a variation notice in situations where:

  • the vendor can show that:
    • they will not make a taxable capital gain (e.g. capital loss or CGT rollover), or
    • they will not otherwise have an income tax liability (e.g. prior year capital or revenue losses), or
    • a secured creditor can show that the FRCGW will
  • adversely affect the creditor's ability to recover their debt from the vendor.

Either a vendor or purchaser can apply for a variation notice, but it is likely that a vendor would apply since they have the relevant information. The ability for secured creditors to apply for a variation notice is helpful since it remedies a situation where an uncooperative mortgagor is unwilling to apply for a clearance certificate or to make the required written declaration to prevent FRCGW applying.

Obtaining a variation notice in itself is not enough to prevent FRCGW. The variation notice must be provided to the purchaser at settlement for it to operate to reduce FRCGW.

Whilst the turnaround time to obtain a clearance certificate is relatively quick, obtaining a variation notice generally takes longer because it is essentially a formal submission to the ATO on why the FRCGW should not apply. Insolvency practitioners should be aware that the ATO may not always vary the FRCGW to nil and instead may either:

  • reduce the FRCGW only to a partial extent on the basis that sale proceeds may be enough to pay out a secured creditor and partially pay FRCGW, or
  • the ATO may defer the time when FRCGW is payable to a time other than settlement of the transaction. For instance, in Law Companion Guideline LCG 2016/5 the ATO indicates that in a foreclosure situation where a bank seizes the legal title to a property, the ATO may choose not to vary the FRCGW to nil if the market value of the property indicates that the proceeds receivable on a disposal of the property will be sufficient to cover both the bank's secured debt and the FRCGW arising on the change of legal title to the bank's name. In such a situation the ATO may instead defer the time the bank is required to remit FRCGW to the time of the sale of the property.

In auction situations where the sale price is unknown, the ATO may issue conditional variation notices. That is, FRCGW may not be required to be withheld and remitted if the sale price is below a set figure but above a set figure withholding is required.

Whilst the FRCGW contains insolvency exclusions which mean that many insolvency transactions are exempt from FRCGW it is important to recognise that not all insolvency transactions are covered by these exclusions. Notably a mortgagee in possession who does not manage the subject property may not be exempt from FRCGW and must manage their situation appropriately (e.g. by obtaining a clearance certificate, written declaration or variation notice) to ensure that cash flow issues do not arise as a result of the FRCGW applying.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Colin Biggers & Paisley
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions