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Foreign Resident Capital Gains Tax Withholding Requirements

New withholding tax measures now place increased obligations on both vendors and purchasers dealing with real property to the value of $2 million or more

Buying or selling Australian property? Understand your new clearance obligations.

New foreign resident capital gains tax measures will come into force on 1 July 2016.

The changes will have wide ranging implications for anyone looking to deal with real property in Australia (both commercial and residential).

Vendors and purchasers alike must be aware of these new obligations to ensure compliance with the ATO’s requirements and to avoid finding themselves out of pocket.

The new rules: presumptive requirement to withhold.

Under the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015, from 1 July 2016 the legislation effectively provides that any purchaser who purchases real property with a value of $2 million or more (inclusive of GST if applicable) from a foreign resident (or anyone who does not provide a “clearance certificate”) will be required to withhold 10% of the purchase price and pay this amount to the ATO rather than the vendor or as the vendor otherwise advises.

If the transaction is conducted on an arm’s length basis, the purchase price may be used as an appropriate proxy for market value.

The 10% withholding requirements apply to the following interests:

  • real property in Australia – land, buildings, residential and commercial property;
  • lease premiums paid for the grant of a lease over real property in Australia;
  • mining, quarrying or prospecting rights;
  • interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest; and
  • options or rights to acquire the abovementioned property or interest(s).

Contracts entered into on or after 1 July 2016 will be subject to the new 10% withholding requirements.

The requirements will also apply to transactions where there is no written contract where the acquisition is made on or after 1 July 2016.

The 10% withholding amount is calculated on the land component of the transaction (not associated chattels, goodwill or other assets).

Getting out of it: avoiding the presumptive requirement to withhold.

If the vendor produces a clearance certificate, the purchaser avoids the requirement to withhold.

Similarly, if the market value and purchase price is below the $2 million (inclusive of GST if applicable) threshold requirement, the purchaser avoids the requirement to withhold.

In other situations, vendors and purchasers should take note of their obligations and seek legal advice to ensure compliance.

Do current industry standard contracts for the sale and purchase of land deal with the changes?

At the time of writing industry bodies (such as the Law Society of South Australia, Real Estate Institute of South Australia, Australian Institute of Conveyancers (SA Division), Society of Appraisers and Auctioneers) that provide “standard” contracts for the sale and purchase of land that are used by a large majority of industry professionals (real estate agents, conveyancers and solicitors) do not contain adequate provisions to deal with the new withholding measures.

Accordingly both vendors and purchasers should obtain advice to ensure they are adequately protected prior to entering into any contracts where the new measures apply.

Vendors: what you need to know.

A clearance certificate must be applied for and provided to the purchaser for the disposal of Australian real property to the value of $2 million (inclusive of GST if applicable) or more.

Only Australian tax residents will be provided clearance certificates.

Clearance certificates are obtainable from the ATO either by the vendor or its authorised representative. Cowell Clarke can assist vendors with their clearance certificate obligations.

If the vendor does not provide a clearance certificate to the purchaser prior to settlement, the vendor will be deemed a foreign resident.

This means the purchaser must withhold 10% of the purchase price and pay this amount to the ATO (rather than paying this amount to the vendor or as the vendor otherwise advises). This could have significant implications for vendors, in particular in relation to any financiers that the vendor needs to pay out or otherwise satisfy at settlement.

A single clearance certificate can be produced for multiple properties (if those properties are disposed of within the period that the clearance certificate is valid).

Online applications for clearance certificates from the ATO are now open. The ATO has indicated clearance certificates will take 14-28 days to be processed. Complex cases may take additional time. Clearance certificates are likely to be valid for 12 months following issue from the ATO.

Where the vendor is unable to access a clearance certificate, they may apply for a “variation application for foreign residents and other parties” and request a variation to the withholding tax requirements from the ATO. This variation notice is to be provided to the purchaser.

It is paramount that vendors seek to obtain a clearance certificate (or variation notice) well before any scheduled settlement date and do not “leave it to the last minute” as that would result in a delay to settlement and under most contracts the vendor would be in default and potentially liable to the purchaser for a claim for damages.

It is highly recommended that vendors contact their solicitor or conveyancer to ensure they satisfy their requirements to provide a clearance certificate (or variation notice). It is also recommended that vendors consider whether additional provisions should be included in their contracts in circumstances where no clearance certificate is provided (i.e. where the vendor is a foreign resident) that require the purchaser:

  • to provide notification of filing the payment notification with the ATO prior to settlement and to ensure the ATO processes have been complied with;
  • to produce a receipt of payment of the withholding amount that has been paid to the ATO; and
  • to comply with all requirements or audit requests of the ATO at their own cost and expense.

Accordingly it is strongly recommended legal advice is sought by vendors to ensure contracts contain suitable clauses to protect vendors as a result of the new withholding tax regime.

Purchasers: what you need to know.

If the vendor does not provide a clearance certificate (or variation notice) on or before settlement, the purchaser must pay the 10% withholding amount to the ATO.

It is the purchaser’s responsibility to ensure that the obligation to withhold the 10% amount and to pass this onto the ATO is carried out.

If the purchaser fails to withhold and pass on to the ATO the 10% withholding amount, the purchaser will be subject to penalties (and interest) on any late payment of the withholding amount.

In instances where the vendor does not provide a clearance certificate (or variation notice) the purchaser must:

  • file a purchaser payment notification with the ATO and provide this to the vendor at least five days before the date for completion; and
  • produce a settlement cheque on completion for the withholding amount and forward this to the ATO immediately after completion.

It is highly recommended that purchasers ensure their contracts contain clauses requiring the vendor to provide a valid clearance certificate (or variation notice) prior to settlement (if applicable). Purchasers should also consider whether it is necessary to include specific indemnities in their contracts to deal with instances where the vendor fails to provide a valid clearance certificate (or variation notice) at settlement.

It is strongly recommended that legal advice is sought by purchasers to ensure contracts contain suitable clauses to protect purchasers as a result of the new withholding tax regime.

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