The new CGT withholding provisions commence on 1 July 2016 and, as the commencement date draws closer, it is becoming more apparent that the scope of the provisions is much wider than suggested by the government and the ATO.
In fact, in a recent conference call, ATO representatives acknowledged that the material on the ATO website is inaccurate in some respects.
There are some key issues that all practitioners need to be aware of:
- The measures do not just apply to sale transactions.
Any event that is an actual or deemed 'acquisition' under Division 109 of the 1997 Tax Act may trigger a withholding obligation.
For example, if a person dies, the transfer of title of land to their executors may be caught by the withholding provisions and the executors will either have to obtain a clearance or variation certificate or be liable for withholding tax.
- The ATO position is that the measures only apply to changes of legal ownership of assets.
It is questionable whether the ATO position on this issue is consistent with the legislation. If it is correct, transactions that involve a change in beneficial ownership without a transfer of title will not trigger any withholding obligation (e.g. a declaration of trust).
This also means a transfer of title of real property from a retiring trustee to a new trustee may require the outgoing trustee to obtain a clearance certificate.
- A withholding obligation will arise even when there are no CGT consequences because of a mandatory rollover (e.g. a matrimonial rollover).
- The $2 million 'safe harbour' threshold does not apply to transactions involving options, shares or units.
- If a party holds land as trustee and a clearance certificate is required, the ATO have advised that the application for the clearance certificate must be in the name of the trustee – not the trust.
This is likely to cause confusion and possible delays in getting clearance certificates in these cases because of the propensity for parties and regulators to confuse the ABN/TFN identifiers for a trustee as opposed to the trust estate.
In cases where a company only acts as trustee, it may never have lodged a tax return so the ATO will have no history to assess the residency credentials of the applicant.
- Trustees of discretionary trusts will often need to answer 'yes' to question 3 in section D of the clearance certificate application
This question asks if the applicant holds the land 'on behalf of other entities that include a foreign resident'.
Because the eligible beneficiaries of most discretionary trusts include a wide range of relatives and connected entities, it will be common to find that some of those eligible beneficiaries are foreign residents (at least for tax purposes).
- The ATO view is that the obligation to make a withholding payment will arise on the date of completion of a sale transaction but they will allow a period of grace.
Unfortunately, the ATO has given no indication as to what this period of grace may be.
- When drafting contracts for the sale of real property where the market value exceeds $2 million, make sure that the contract:
- confirms that the buyer can deduct any withholding amount from the purchase price; and
- does not require the buyer to 'gross up' the amount payable to take account of any withholding tax.
The Queensland Law Society and REIQ will shortly be issuing a revised standard contract to deal with these issues.
- In all 'non-standard' contracts (particularly those involving dealings with options, shares or units) it may be prudent to include a declaration by the seller that they are not a foreign resident, just in case the transaction is caught by the legislation. Having a declaration in the contract cannot result in any adverse consequences and will reduce the risk of clients becoming liable for the withholding tax because they were not aware of a residency issue.
- When implementing transfers of real estate pursuant to a change of trustee, it may be prudent to get a clearance certificate from the retiring trustee in all cases – if the ATO does not change its current position. This avoids the need to incur the cost of a valuation to determine whether the value is over or under the safe harbour threshold.
There will be many other detail issues that will emerge as practitioners start to apply these new rules in practice and it is to be hoped that the ATO will issue further more specific guidelines as issues emerge.
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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.