ON 25 FEBRUARY 2016, Parliament passed a new foreign resident capital gains tax withholding regime.
The regime applies to contracts entered into on or after 1 July 2016; and is intended to assist the Commissioner of Taxation in the collection of the CGT payable by foreign residents.
Under the regime, a 10% non-final withholding tax will apply to foreign residents on the disposal of relevant taxable Australian property.
What will this mean?
This regime will impact all vendors and purchasers of Australian real estate.
Vendors will now be required to obtain a clearing certificate from the ATO certifying that they are not a foreign resident. If the vendor fails to provide such a certificate, the purchaser is required to withhold 10% of the purchase price prior to settlement and will be subject to a penalty if they fail to do so.
The purchaser is then required to submit a "Purchaser Remittance Form" to the ATO providing details of the vendor, purchaser and the asset being acquired along with the GCT Amount that has been withheld. The vendor will then be entitled to a credit for the amount paid to the Commissioner, claimable when the vendor lodges their income tax return.
Exceptions to CGT withholding regime
There are several exclusions to the regime. If the foreign resident vendor falls within one of the following categories then a withholding tax will not apply:
- Real property transactions with a market value under $2 million (ensuring that the vast majority of residential house sales will be unaffected by this measure);
- Transactions listed on an approved stock exchange;
- The foreign resident vendor is under external administration or in bankruptcy;
- An amount is already required to be withheld as withholding tax for some other reason.
Where the vendor is not entitled to a clearance certificate but believes a withholding of 10% is inappropriate, the vendor can apply for a variation. This involves the vendor completing an online 'Variation Application' requesting a lesser rate be withheld by the ATO.
Variations are expected to be provided within 28 days. The vendor must then provide a notice of variation to the purchaser to ensure that they withhold tax at the reduced rate.
What you need to do
Investors will need to consider the requirement for a clearing certificate. In particular, investors must be aware of the impact of obtaining such a certificate on the timing and documentation of their transactions. In straightforward cases where the ATO has all the required information, full clearance certificates are expected to be provided within days of being submitted.
Bottom Line: Where there unusual circumstances or data irregularities clearance certificates could take up to 28 days to process. Investors must be aware of these timelines and consider how they may affect the timing of their transactions.
Disclaimer: If you think a similar situation may apply to you, then you should contact us for detailed legal advice relating to the particular facts and circumstances of your property or lease agreement. This article is not intended to provide such detailed and specific advice. And, you should not act on the basis of any matter contained in this article without first obtaining more comprehensive professional advice.