Foreign resident capital gains withholding payments legislation

Amendments to the Taxation Administration Act 1953 (Cth) (‘Act’) came into effect on 1 July, 2016.

Have you entered into a Contract for Sale of Land after 1 July, 2016?

The new regime requires Purchasers of specific Australian assets to withhold 10% of the purchase price and pay it to the Commissioner of Taxation.

The legislation has been introduced to ensure that any foreign resident Vendors pay Australian tax on the realisation of Australian assets. What this means is that all Australian resident Vendors will need to comply with the new regime before settlement if they are to receive the full proceeds of sale on settlement.

What assets fall under the new regime?

  1. A direct interest in Australian real property.
  2. An indirect interest in Australian real property, which includes the sale of shares in a company which holds Australian real property, where the market value of the Australia real property assets of the company is more than the market value of its other assets; and
  3. The grant of an option or right to acquire a direct or indirect interest in Australian real property.

Under the legislation, Australian real property includes leases over Australian Real property and mining, quarrying or prospecting rights.

What is the value of the specific asset?

The new regime is applicable only if the market value of the land is $2 million dollars or more (exclusive of GST). If the parties to the transaction are unrelated, the purchase price will in most circumstances be considered to be the market value of the asset.

When does the Purchaser’s obligation to withhold occur?

If the Vendor does not provide the Purchaser with a Clearance Certificate issued by the Commissioner certifying that the Vendor was not a foreign resident at the time which the transaction was entered into, the Purchaser must withhold 10% of the purchase price. It is then the obligation of the Purchaser to pay this amount to the Australian Taxation Office at or before settlement. In respect to the new legislation the definition of foreign resident is the same as under the Income Tax Assessment Act 1936 (Cth).

In order to comply with the new legislation, the Purchaser needs to ensure that the terms of the Contract allow the Purchaser to retain 10% of the purchase price should the market value of the land be $2 million dollars or more (exclusive of GST).

Whilst the responsibility of compliance is put on the Purchaser, the onus is on the Vendor to obtain and provide the Purchaser with a valid Clearance Certificate.

How does a Vendor obtain a Clearance Certificate?

The Vendor must apply to the Australian Taxation Office for a Clearance Certificate. This can be done online here.

The Clearance Certificate has a duration of 12 months and must be valid at the time the transaction is entered into. A copy of the Clearance Certificate must then be provided to the Purchaser prior to completion of the transaction.

Should the Vendor not be able to get a Clearance Certificate there is provision for either the Vendor or the Purchaser to apply to the Australian Taxation Office for the amount that is to be withheld ie. if the land is being sold at a loss then the Vendor will not have a capital gains tax liability.

How does a Purchaser have to pay?

The Purchaser must complete an online “Purchaser Payment Notification” form on which the details of the Vendor, Purchaser and the asset which is the subject of the transaction must be inserted. The payment of the relevant amount to the Australian Taxation Office can be made by electronic funds transfer or by cheque, either at a post office or forwarded to the Australian Taxation Office direct.

Penalties apply if Purchasers do not pay the required amount on time.

What are the obligations of the Vendor?

If a Vendor is entering into a Contract for Sale of Australian land on or after 1 July, 2016 and the land’s market value is $2 million dollars or more (exclusive of GST) the Vendor MUST apply for a Clearance Certificate that is valid at the time that the Contract for Sale is entered into. The Clearance Certificate MUST then be provided to the Purchaser prior to settlement of the transaction. If the new regime is complied with the Purchaser will not be obligated to retain 10% of the purchase price.

What are the obligations of the Purchaser?

If a Purchaser enters into a Contract for the purchase of Australian real property having a market value of $2 million dollars or more (exclusive of GST) on or after 1 July, 2016 and the Vendor does not provide the Purchaser with a Clearance Certificate valid at the time that the Contract was entered into, the Purchaser MUST retain 10% of the purchase price for payment to the Australian Taxation Office.

This article only applies to the implementation of the new regime to the sale of a direct interest in Australian real property. The new regime applies differently if an option for the sale or purchase of land is entered into.