Foreign Resident – Capital Gains withholding framework
Australia’s foreign resident capital gains withholding regime came into effect as a response to the increased pressures of low tax compliance of foreign residents.
The new framework applies to buyers of specific Australian property sold by foreign resident sellers. The withholding regime applies to contracts entered into from 1 July 2016.
Where a buyer seeks to buy prescribed property from a foreign resident seller and the contract is entered into or an option in an existing contract is exercised on or after 1 July 2016, the buyer, subject to exemptions, will be required to withhold 10% of the first element of the cost base (generally the purchase price) and pay that amount directly to the Australian Tax Office.
What property is affected?
The property subject to the new regime can be broken into two categories:
- real Australian property, with a market value of $2million or more, including:
a. vacant land, buildings, residential and commercial property;
b. leases where a premium is paid for the grant of a lease; or
c. mining, quarrying or prospecting rights where the materials are located in Australia;
- other assets, including:
a. indirect Australian property interests; or
b. options or rights to acquire any type of property or interest listed.
What property is excluded?
The capital gains withholding regime will not apply to:
- The sale of taxable real Australian property with a market value of less than $2million (thereby excluding the majority of residential house sales);
- An indirect Australian real property interest providing a company title interest with a market value of less than $2 million;
- Transactions conducted through an approved stock exchange;
- Transactions subject to another withholding obligation;
- Securities lending arrangements;
- Transactions involving a seller who is under external administration or who has been declared bankrupt; and
- Transactions where a clearance certificate is obtained from the ATO.
Who is classified as a ‘foreign resident’ seller?
A seller will be classified as a foreign resident seller if they do not provide the buyer with a valid clearance certificate or they provide a seller declarationconfirming that they are a foreign resident. This is the case regardless of whether the seller is an Australian resident for other tax purposes.
I am an Australian resident seller, what do I have to do?
Australian resident sellers are required to obtain a clearance certificate or a seller declaration. Without a clearance certificate, the buyer is required to withhold 10% of the purchase price. If you do not obtain a clearance certificate prior to settlement, you may be eligible to claim a credit for the 10% amount withheld upon lodging your tax return. A clearance certificate is linked to a seller, so the same certificate can be used for multiple properties and multiple buyers.
How long will it take to get a clearance certificate?
A clearance certificate needs to be obtained from the ATO prior to settlement. Sellers are encouraged to obtain these certificates as soon as possible to avoid delays and unnecessary withholdings. The clearance certificates are valid for 12 months and can be applied for before the property is listed for sale. The ATO has implemented an ‘automatic’ system for issuing clearance certificates and anticipates the certificates to be produced within a few business days of submitting the application. Where there are complex matters to consider or irregularities in the data, the ATO anticipates a 14-28 day turnaround time.
As a foreign resident, can I apply for a reduction in the withholding amount?
Foreign residents may apply for a variation to the withholding amount by submitting a “Foreign resident capital gains withholding rate variation application” online.
As a guideline, circumstances where a variation may be justified include where a seller will not make a capital gain on the transaction (such as where the seller is positioned to make a loss or a CGT roll-over applies). Unlike a clearance certificate, the variation certificate is specific to the asset being disposed of and will be issued within 28 days.
I am required to withhold funds from settlement, how do I pay the ATO?
Where a buyer is required to withhold funds from settlement, the buyer must complete a ‘purchase payment notification’ and provide payment to the ATO prior to settlement. However, this poses a practical problem as cheques upon settlement are usually drawn in exchange for clear title and buyers and mortgagees are unlikely to transfer funds prior to actual settlement.
If there is a shortfall in settlement funds due to the withholding regime and the mortgagee will not release the mortgage, then the owner (or a mortgagee exercising power of sale or a receiver of the property) can apply for a foreign resident capital gains variation to have the withholding reduced.
If you need any further information regarding the new laws or assistance with applying for a clearance certificate, please contact us.