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New foreign resident capital gains tax withholding regime

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By Evelyn Marcou, Senior Associate, MST Lawyers

Effective from 1 July 2016, a new regime will impose an obligation on a purchaser who purchases Australian assets with a market value of at least $2 million (“Target Assets”) from foreign residents to collect and remit 10% of the purchase price to the Australian Taxation Office. Target Assets include:

  • all real property such as land, buildings, residential and commercial property and includes leases;
  • mining, quarrying or prospecting rights;
  • indirect interests in Australian entities whose major assets consist of real property; and
  • option rights to acquire any of the above.

The purpose of the new regime is to ensure that the interests of foreign residents remain subject to Australian CGT laws. Since 2006 foreign residents have been subject to Capital Gains Tax (CGT) on disposals of Australian assets . However, compliance with the voluntary regime of compliance has been low.

What impact will this have on property transactions?

The new regime creates impositions for vendors and purchasers and their lawyers.

Special conditions in a vendor’s contract will be required giving warranties relating to a vendor’s residency status. False declarations are liable to penalties of up to $21,600.

A purchaser must treat a vendor as a foreign resident (even if the vendor is an Australian resident) until a Clearance Certificate is obtained from the ATO or a Vendor Declaration.  

Clearance Certificate

To obtain a Clearance Certificate, an Australian resident vendor must provide the ATO with the vendor’s tax file number, residency status and details of the acquisition, such as title particulars and transaction dates.  Once obtained, the Clearance Certificate will confirm a vendor’s Australian residency status and that an amount does not need to be withheld from the purchase price.  Applications must be made online.  A vendor may apply for a Clearance Certificate at any time prior to selling. When there is more than one vendor each vendor will need to give a warranty or provide a certificate.

Vendor Declaration

There are two types of Vendor Declarations:

  1. a declaration that the vendor is an Australian resident; and
  2. a declaration that the asset being disposed of is not an indirect Australian real property interest.

Presently, there is no approved form for Vendor Declarations and it is also not clear as to whether these declarations will take the form of a statutory declaration.  The ATO has advised that templates will be available from the ATO website from 1 July 2016.

A further concern for vendors will be how to manage the withholding payment to the ATO by the purchaser. If the payment is not made then there is no credit to the foreign resident vendor. A receipt or some other evidence will be required at settlement. The penalty for a non complying purchaser is equal to the amount that should have been withheld and remitted to the ATO.

Purchaser’s beware

All purchasers should ensure that the transaction document (eg Contract of Sale of Real Estate) obliges the vendor to provide the purchaser with a Clearance Certificate or Vendor Declaration (if applicable) and that they are provided before settlement.

For further information, please contact our experienced Property & Leasing team by email property@mst.com.au or by telephone Ph: +61 3 8540 0200.