Property 101: Foreign resident capital gains withholding rules

Property 101: Foreign resident capital gains withholding rules
Property 101: Foreign resident capital gains withholding rules

This content explains the operation of the new withholding tax regime.

We suggest you read it in conjunction with Foreign resident capital gains withholding.

The withholding obligation

When do the rules apply?

The rules apply when:

  • an entity (the purchaser) becomes the owner of a CGT asset as a result of acquiring it from a vendor (or vendors) under one or more transactions
  • at least one of those vendors is a relevant foreign resident at the time at least one of the transactions is entered into
  • the CGT asset is a certain type of Australian property or an option or right to acquire such property
  • the purchaser acquires the CGT asset under a contract entered into on or after 1 July 2016, and
  • there are no exceptions.

While the objective of the rules is to assist in the collection of foreign residents' CGT liabilities, the withholding tax will apply regardless of whether the vendor's gain on the sale of the asset is subject to tax under the CGT regime or as ordinary income.

The withholding obligation applies to both Australian resident and foreign resident purchasers.

When is a vendor a relevant foreign resident?

A vendor is a relevant foreign resident for the purposes of the withholding obligation if:

  • the purchaser knows or has reasonable grounds to believe that the vendor is a foreign resident, or
  • the purchaser does not reasonably believe that the vendor is an Australian resident and:
  • has a record about the purchase indicating that the vendor has an address outside Australia, or
  • is authorised to provide a financial benefit (eg make a payment) to a place outside Australia (whether to the vendor or to anybody else).

A vendor who sells the following assets is also a relevant foreign resident, even if they are an Australian resident for other tax purposes:

  • real property situated in Australia (including a lease of such land)
  • mining, quarrying or prospecting rights in relation to minerals, petroleum or quarry materials situated in Australia (to the extent those rights are not real property)
  • shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, an indirect Australian real property interest giving rise to a company title interest in land).

A vendor who sells these assets is not a relevant foreign resident if they have obtained a valid clearance certificate from us and given the clearance certificate to the purchaser before settlement.

A vendor who sells any other type of asset to which this withholding tax applies is not a relevant foreign resident if they have given a valid declaration to the purchaser and the purchaser does not know the declaration to be false.

When will a purchaser know or have reasonable grounds to believe that the vendor is a foreign resident, or that the vendor is not an Australian resident?

The knowledge condition is only relevant to purchases of indirect Australian real property interests (other than company title interests) and options and rights to acquire taxable Australian real property or indirect Australian real property interests.

The knowledge condition will be satisfied where the purchaser:

  • has specific knowledge that a vendor is a foreign resident – such as where the vendor discloses that they are a foreign resident for tax purposes, or
  • reasonably believes the vendor is a foreign resident. This may occur, eg where the purchaser learns that the vendor is living overseas. This is an objective test, meaning that, if a reasonable person in the position of the purchaser would have thought that there were reasonable grounds to support the belief, the purchaser is taken to have reasonably held that belief, or
  • does not reasonably believe that the vendor is an Australian resident, provided that the purchaser also has a record about the purchase indicating that the vendor has an address outside Australia, or is authorised to provide a financial benefit (eg make a payment) to a place outside Australia. Again, specific knowledge by the purchaser is required, or a reasonable belief based on an objective analysis.

Purchasers who are not comfortable determining whether the knowledge condition is satisfied may instead seek a vendor declaration confirming that the vendor is not a relevant foreign resident. A failure by the vendor to provide the declaration in these circumstances can be taken by the purchaser as confirmation that the vendor is a relevant foreign resident.

To which types of Australian property does this withholding tax apply?

The withholding obligation applies to purchases of taxable Australian real property, including:

  • real property situated in Australia
  • a lease of land in Australia if a lease premium has been paid for the grant of the lease
  • a mining, quarrying or prospecting right (not being real property), if the minerals, petroleum or quarry materials are situated in Australia, including:
  • an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials
  • a lease of land in Australia that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land, if a lease premium has been paid for the grant of the lease or an interest in such an authority, licence, permit, right or lease
  • an indirect Australian real property interest (that is, a membership interest of 10% or more in an entity whose underlying value is principally derived from Australian real property). This includes shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest in real property)
  • an option or right to acquire any type of property or interest listed above.

What does ‘petroleum’ include?

Petroleum means any of the following naturally occurring substances:

  • hydrocarbon or mixture (or mixtures) of hydrocarbons (gas, liquid or solid), or any mixture of such hydrocarbons and one or more of
  • hydrogen sulphide
  • nitrogen
  • helium
  • carbon dioxide

Does the withholding tax apply to share issuances?

The withholding obligation does not apply if the purchaser acquires shares as a result of being issued or allotted those shares because the shares will not be indirect Australian real property interests.

For the withholding obligation to apply, all the necessary conditions in the law must be met at the time the transaction is entered into.

An indirect Australian real property interest is a membership interest (eg a share) held by one entity in another entity if certain additional conditions are met. At the time the share issue transaction is entered into, the shares are not membership interests that the issuing company holds in another entity (they are membership interests in the issuing company itself), and therefore cannot be indirect Australian real property interests.

Does the withholding tax apply to intra-consolidated group transactions?

Yes. Members of a consolidated group must be Australian residents. However, a member of a consolidated group that purchases from another member of the consolidated group an asset to which the withholding applies, is still required to comply with the withholding obligation if the vendor is unable to provide a clearance certificate or declaration (as relevant) and no other exceptions apply.

In practice, a clearance certificate can be applied for and issued to:

  • the head company (an attachment can list all members of the consolidated group to which it can apply), or
  • the member of the consolidated group on the title of the property.

Does the withholding tax apply to transactions involving members of consolidated groups and third parties?

Yes. A withholding obligation is not a factor taken into consideration when calculating an entity's income tax liability, as withholding is a collection mechanism that only affects the timing and quantum of the payment that must be made to satisfy the liability. Accordingly, the withholding obligation does not fall within either of the core purposes for which the single entity rule (SER) applies. For this reason, a member of a consolidated group that purchases an asset to which the withholding applies from a third party is required to comply with the withholding obligation if the third party is a relevant foreign resident and no other exceptions apply.

Exceptions

The purchaser is not required to withhold an amount under these rules if any of the following apply:

  • the CGT asset is taxable Australian real property or an indirect Australian real property interest giving rise to a company title interest – the market value of the property or interest is less than $2 million
  • the CGT asset is taxable Australian real property or an indirect Australian real property interest that gives rise to a company title interest – the vendor provides the purchaser with a clearance certificate that they have obtained from us
  • the CGT asset is a membership interest in an entity – the vendor provides the purchaser with a written declaration stating that the membership interest is not an indirect Australian real property interest, and the purchaser does not know the declaration to be false
  • the CGT asset is another type of asset to which the withholding tax applies – the vendor provides the purchaser with a written declaration stating that they are an Australian resident, and the purchaser does not know the declaration to be false
  • the transaction is on an approved stock exchange
  • the transaction is conducted using a broker-operated crossing system, such as a ‘dark pool’, as described in the ASIC Market Integrity Rules (ASX Market) 2010
  • another withholding obligation already exists in respect of the transaction
  • the transaction constitutes a securities lending arrangement for which a CGT rollover is available
  • the transaction arises from the administration of a bankrupt estate or insolvency.

Market value

How is the market value of the asset determined?

In many cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser acting at arm’s length as part of a competitive bargaining process, we will accept the purchase price as a proxy for market value. However, there could be circumstances where the market value is different to the stated purchase price (eg where the vendor and purchaser are related parties and did not deal with each other at arm’s length). In such cases, we will not accept the purchase price as a proxy for market value and the purchaser will need to seek a separate expert evaluation.

Note: If the purchase price is used as a proxy for market value, the market value is the purchase price before adjustment for any disbursements at settlement (eg council rates, water and sewer charges and strata levies). Therefore, the $2 million threshold test is applied to the purchase price before adjustment for disbursements.

What is the effect of GST on market value?

If the purchaser is registered for GST and the supply of the asset is a taxable supply, the market value of the property is reduced by any input tax credit the purchaser is entitled to, based on the assumption that the acquisition is solely for a creditable purpose. Broadly, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on an enterprise. Where the purchaser is registered for GST and the transaction is a taxable supply, the GST inclusive purchase price less the input tax credit may be used as a proxy for market value.

If the purchaser is not registered for GST or the supply of the asset is not a taxable supply (eg because the vendor is not registered for GST or the supply is input taxed), or the purchaser is not entitled to any input tax credit, the GST inclusive purchase price may be used as a proxy for market value.

Note:

  • The purchase price cannot be used as a proxy for market value if the parties have not dealt with each other at arm’s length.
  • The sale of real property that is residential premises (but not commercial residential premises or new residential premises) is input taxed and therefore not a taxable supply.
  • Where the asset is shares, eg company title interests, the supply of shares is input taxed and therefore not a taxable supply.
  • If the margin scheme is used, a purchaser cannot claim input tax credits on that acquisition, even if they are registered for GST and intend to use the purchased property for a creditable purpose. In these instances a GST registered purchaser can (similar to a non-registered purchaser) use the GST inclusive price as a proxy for market value.

Does the $2 million threshold apply to the assignment of a lease?

The purchaser is required to withhold and pay to us 10% of the first element of the CGT asset's cost base.

The obligation to withhold will only arise if a lease premium is paid for the grant of a lease, as the premium forms part of the first element of the cost base. Even where a premium is paid, withholding is only required if the market value of the lease is $2 million or more.

Rent payable under the terms of the lease does not form part of the first element of the cost base, so the acquisition of a lease that does not include the payment of a premium will not give rise to a withholding liability.

Any assignment of a lease that does not involve the payment of a premium will not give rise to a withholding liability.

Clearance certificates

In what circumstances would a clearance certificate be obtained?

In order to avoid an amount being withheld and paid to us by the purchaser, an Australian resident vendor can obtain a clearance certificate from us when the asset being disposed of is any of the following:

  • real property situated in Australia (including a lease of land situated in Australia)
  • a mining, quarrying or prospecting right (not being real property) if the minerals, petroleum or quarry materials are situated in Australia
  • shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest).

We will issue a certificate where we have no reason to believe that the vendor is or will be a foreign resident during a specified period, including the time the transaction is entered into.

It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement. To avoid unanticipated delays, and to ensure the certificate is valid at the time of entering into the transaction, vendors seeking a clearance certificate should apply through the online form as early as practical in the sale process (the online form will be available from 27 June 2016). Without being presented with a valid clearance certificate, the purchaser will be required to remit 10% of the purchase price to us if no other exclusions apply.

What name should be on the clearance certificate?

The name on the clearance certificate must match the name on the Certificate of Title. The purchaser does not have to accept the clearance certificate if there is a discrepancy.

If a vendor has changed their name since acquiring the property so that the vendor's current legal name does not match the name on the Certificate of Title, the vendor must provide evidence of the change of name (eg a change of name certificate or marriage certificate) with their application. We will issue the clearance certificate in the name that matches the Certificate of Title.

What happens if the ATO withdraws a clearance certificate once it has been issued?

We may withdraw a clearance certificate at any time if we obtain further information indicating that the vendor is a foreign resident. This is to ensure that the vendor is not able to use the clearance certificate where we determine they have no entitlement to it. We would expect that the withdrawal of a clearance certificate, once issued, would only occur in very rare situations given the checks and processes that have been put in place when issuing clearance certificates.

Where a purchaser has, in good faith, not withheld from the purchase price on the basis of being provided with a clearance certificate prior to settlement, the purchaser will have met their obligations under the withholding rules. Any subsequent decision by us to withdraw the clearance certificate from the vendor does not alter the fact that the purchaser had correctly complied with the withholding provisions at the time of settlement. The purchaser will not be subject to any interest or penalty for failure to withhold in these circumstances, as at no stage was the purchaser required to withhold, given the vendor had produced a clearance certificate prior to settlement.

What happens if the vendor provides a fraudulent clearance certificate?

If a purchaser receives a document that appears to be a genuine and valid clearance certificate, and in good faith relies on that document to not withhold, we will not pursue the purchaser for the withholding.

If the document is subsequently found to be fraudulent, we will hold the vendor liable for making a false and misleading statement and may prosecute them.

Declarations

Does the vendor declaration have to be in a specified form?

There is no specific form in which the vendor should make the declaration, but templates that can be used for this purpose will be available from our website before 1 July 2016.

The contents of the declaration must not, to the best knowledge of the vendor, be false or misleading.

The declaration may be inserted into a sale agreement as a standard clause contractual warranty.

Paying the ATO

How much does the purchaser have to pay to the ATO?

A purchaser must pay us an amount equal to 10% of the total consideration given to acquire the CGT asset – that is, the money paid, or required to be paid, to acquire the asset and the market value of any property given, or required to be given, in respect of acquiring the asset (worked out at the time of the acquisition). This is known as the first element of the CGT asset’s cost base and is generally equal to the purchase price.

Note: The first element of cost base does not include any disbursements at settlement (eg for council rates, water and sewer charges and strata levies). Therefore, the withholding amount is 10% of the purchase price before adjustment for disbursements.

In certain cases, the 10% withholding may need to be applied to an amount other than the actual consideration given to acquire the CGT asset. For example, in circumstances where the purchaser provides no consideration to acquire the asset, or where the purchaser and vendor are not dealing with each other at arm’s length, the amount to be withheld must be calculated based on the market value of the CGT asset.

If the acquisition of the CGT asset is the result of exercising an option, modified rules apply.

If the CGT asset is a lease, the withholding obligation only arises in respect of lease premiums paid for the grant of the lease, as these form part of the first element of the CGT asset’s cost base. Rent payable under the lease does not form part of the first element of the CGT asset’s cost base and is not subject to the 10 percent withholding rate.

If we have granted a variation request, the varied amount is payable by the purchaser to us.

Options

What special rules apply for CGT assets that are options or the result of exercising an option?

An option to acquire a type of CGT asset to which this withholding tax applies is itself a CGT asset to which this withholding tax applies. The purchaser will therefore be required to remit 10% of the first element of the cost base of the option (usually the option price or option premium) to us, unless the vendor provides the purchaser with a valid declaration or another exception or exclusion applies.

Where a purchaser later acquires the CGT asset as a result of exercising the option, the amount to be paid to us is equal to 10% of the total consideration given to acquire the CGT asset less any payments the purchaser made, and the market value of any property they gave, for the option (or to renew or extend the option). These rules ensure that the purchase price of the option is not counted twice in determining the amount to be withheld.

Non-compliance

What penalties apply if the purchaser fails to withhold an amount from the purchase price?

A purchaser that fails to withhold an amount required to be withheld from the purchase price must pay us a penalty equal to the amount they failed to withhold. We are obliged to give written notice to the purchaser of their liability to pay the penalty and the reasons for imposing the penalty.

The purchaser will also be subject to the general interest charge on any amounts not paid to us by the required date.

Variations

When would a variation request apply?

The purchaser, vendor or a creditor of the vendor may apply for a variation of the amount that must be paid to us by completing the online Variation application for foreign residents and other parties form (this form will be available on our website from 27 June 2016, a PDF version is available before that date).

A variation request may be made where, for example:

  • the vendor will not make a capital gain on the transaction (eg because they will make a capital loss or a CGT rollover applies)
  • the vendor will otherwise not have an income tax liability (eg because of carried-forward capital losses or tax losses)
  • there are multiple vendors, only one of which is a relevant foreign resident, but amounts would have to be withheld on the basis that all vendors are relevant foreign residents
  • a creditor of the vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures
  • a creditor acquires legal title to the property (that is, becomes the purchaser) as a result of an order for foreclosure and its security would be further diminished as a result of having to comply with the withholding obligation.

In determining whether to grant a variation request from a creditor of the vendor, we must have regard to the need to protect a creditor’s right to recover a debt.

If we decide to grant the variation request, we will provide the applicant with a notice of variation stating the revised amount that must be withheld. In appropriate circumstances we may decide no amount needs to be withheld. We may grant the request on the proviso that certain conditions be met (eg that the purchase price for the property does not exceed a certain amount and thus no capital gain will be made).

Amendments

How can a withholding payment be cancelled or amended if a clearance certificate or variation issues after the purchaser has submitted the purchaser payment notification?

Is the foreign resident vendor entitled to a credit for the withholding tax paid by the purchaser?

Yes, contingent upon the purchaser paying the amount to us. We will notify the vendor to confirm a payment has been received.

If the purchaser withholds an amount from the vendor but does not pay the withholding to us, the vendor is not entitled to a credit as no credit has arisen. The vendor is also not entitled to claim the non-payment of the withholding as a tax loss.

In this case we will promptly take action to collect from the purchaser any withholding amount not paid by the due date.

If the vendor is concerned the purchaser may not pay the withholding, the vendor should seek legal advice.

Credits

How does the foreign resident vendor claim the credit?

The vendor must lodge an income tax return in order to claim the credit. The entitlement to a credit arises when we make an income tax assessment (or determine that no income tax is payable) for the income year.

If the foreign resident vendor has provided their TFN to the purchaser, we are notified of this when the purchaser lodges the purchaser payment notification. We can then more easily match the amount withheld to a specific vendor for the purposes of allowing the credit.

Law Companion Guides

Law Companion Guidelines are being developed on a number of specific issues relating to the new withholding regime. 

Information sourced from the Australian Taxation Office.

Tags: 
Capital Gains Foreign Investment

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