What assets does the regime apply to?
The new capital gains tax withholding regime will apply to contracts entered into on or after 1 July 2016 in respect of:
- Taxable Australian real property (“TARP”);
- An indirect Australian real property interest; or
- An option or right to acquire such property or such an interest.
TARP includes residential premises, commercial property, vacant land, leasehold, easements, covenants, mortgages and stratum title schemes.
An indirect Australian real property interest refers to an interest of 10 per cent or more in an entity whose underlying value is principally derived from Australian real property. This includes company title interests where shares confer rights to occupy the real property to which the company has legal title.
Are there any exclusions?
The regime will not apply to TARP and company title interests with a market value of less than $2 million.
The regime will also not apply to transactions undertaken on a stock exchange, securities lending arrangements or where a foreign resident is under external administration or bankruptcy arrangements.
What action needs to be taken?
The onus is on an Australian tax resident vendor to provide evidence that it is an Australian tax resident so that the withholding regime will not apply. The means by which the vendor provides such evidence differs according to the type of property being sold.
Where the interest is TARP or a company title interest, the vendor must obtain a clearance certificate. The Australian Taxation Office (“ATO”) will be administering the clearance certificate application process and has indicated that such certificates will be valid for 12 months.
Where the interest is another type of asset covered by the provisions, the vendor must provide a residency declaration and the purchaser must not know or have reason to believe that the vendor is a foreign resident. A residency declaration will last for a maximum of six months.
Without such a clearance certificate or residency declaration, a vendor will be considered to be a foreign resident.
It will be possible to apply to the Commissioner for a variation of the withholding amount payable in certain circumstances such as where a foreign resident is not expected to derive a capital gain on the transaction or will not otherwise have an income tax liability due to the availability of losses.
The ATO has not yet released the relevant clearance certificate application form so we do not know the specific details that will be required. However, once the form is available we recommend that Australian tax resident vendors contemplating a relevant sale within the next year consider obtaining the form at their earliest convenience so as to prevent the clearance approval procedure from impeding the sale process.
As the 10 per cent withholding represents a non-final withholding tax, foreign resident vendors will still be required to lodge an Australian tax return in respect of the disposal of the property and will be entitled to claim a credit for the amount paid to the Commissioner under these provisions.