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New Withholding for Non Residents
A new capital gains tax (CGT) withholding regime will apply from 1 July 2016.
The purpose of the regime is to facilitate the collection of CGT from non-residents and is one of a suite of tougher measures the Government has introduced to address perceived tax leakage in the cross-border context. Other recent developments include tax-related conditions for FIRB approval, the ‘BEPS’ international anti-avoidance initiatives (including the amendments to Part IVA of the Tax Act aimed at alleged multinational tax avoidance), mutual assistance in the collection of international tax debts, and the granting of more expansive information gathering powers to the ATO.
Under the new CGT withholding regime, liability is imposed on buyers to remit 10 per cent of the purchase price to the ATO at the time of settlement when buying certain direct and indirect interests (such as shares or options) in land and resource-related assets from non-residents. The purchaser is liable for a penalty of the amount of the withholding if the amount is not paid. If the purchaser is a company the directors can be personally liable.
To be prepared for the start of the new regime on 1 July 2016 and to avoid delays at settlement purchasers should give consideration to:
- any changes that need to be made to documentation; and
- the procedures and the time required to obtain a declaration or clearance certificate from vendors who are Australian residents or to make an application to the ATO for a variation of the amount payable.
YML can advise you with respect to both of these issues.
What assets does the withholding regime apply to?
Unless an exception applies, the measure will apply when parties enter into a contract on or after 1 July 2016 to sell, transfer or assign:
- a direct interest in Australian land (including a lease of Australian land); or
- certain rights relating to resources situated in Australia; or
- an indirect interest in Australian real property, which means a 10 per cent or more interest in an Australian entity that predominantly holds any of the above assets; or
- an option or right to acquire any of the above; and
at the time that the contract is entered into:
- the purchaser knows, or reasonably believes, that the vendor is a foreign resident; or
- the purchaser does not reasonably believe the vendor to be an Australian resident, and the vendor has an address outside of Australia or the purchaser is authorised to provide a related financial benefit to a place outside of Australia (whether to the vendor or to anyone else); or
- the asset is a relevant direct interest, resource related right or indirect interest that causes a ‘company title interest’.
This last point is significant because it may result in the regime applying even though the purchaser knows the vendor is an Australian resident, and will likely require Australian resident vendors selling these types of assets to seek a clearance certificate.
What must be withheld?
The amount to be remitted to the ATO is 10 per cent of the ‘first element of the CGT asset’s cost base’. In the usual case, the cost base will be equal to the purchase price of the buyer. However, it also includes the market value of any non-monetary consideration to be given to the vendor, any liabilities assumed by the purchaser and GST if the purchaser is not entitled to an input tax credit for GST paid. If the transaction is not on arms-length terms, the first element of the cost base is deemed to be the market value of the asset.
If the acquisition subject to withholding is the result of the exercise of an option, the amount to be paid is the exercise price less the option price. It remains unclear how the withholding rules will apply in the case that the vendor ceased to be an Australian resident after granting the option. It is expected that the ATO will issue guidance on this issue.
Exemption: transactions under $2 million
When the relevant asset is either a direct interest in land or indirect interest giving rise to a company title interest and is valued at less than $2 million, no withholding is required. However, if the interest is an option or right to acquire a direct interest in land or indirect interest giving rise to a company title interest valued at less than $2 million withholding will still be required on any option premium paid unless another exemption exists or a variation is sought and received from the ATO.
Exemption: clearance certificates
When the relevant asset is a direct interest in land or indirect interest giving rise to a company title interest the vendor may apply to the ATO for a clearance certificate to relieve the purchaser of their obligation to withhold and remit funds to the ATO.
The ATO says that it will have an online system to apply for clearance certificates and expects that straightforward clearance certificates will be provided “within days” of being submitted (14 to 28 days if there are “data irregularities or exceptions”). A clearance certificate remains valid for 12 months from the date of issue meaning that a certificate could be sought at the time a property is listed for sale.
Exemption: vendor declarations
Where the relevant asset is an indirect interest in land and not a company title interest, a vendor may make a declaration that it is an Australian resident for the relevant period. Provided that the purchaser does not know the declaration to be false, the purchaser is relieved from the obligation to withhold and remit funds to the ATO. A declaration remains valid for 6 months after it is made.
The following other exemptions are available from the withholding regime:
- transactions on an approved stock exchange or on a broker operated cross system;
- securities lending arrangements; and
- transactions in respect of external administration and bankruptcy.
Purchasers, vendors, and creditors of vendors may apply for a variation of the amount to be withheld and paid to the ATO. Circumstances in which a variation could be made include:
- if there are multiple vendors, only some of which are foreign residents;
- if it can be shown that no capital gain will be realised by the vendor, although the ATO may refuse to make a variation if the vendor has or expects to have other Australian tax liabilities; and
- on the application of a secured creditor, for example if the proceeds of sale of an asset subject to withholding are insufficient to cover both the amount payable to discharge the security and the amount payable to the ATO.
The ATO must have regard to the interests of creditors when exercising the variation power and the explanatory memorandum to the Bill states that “it is not the intention of these amendments to undermine the security of creditors in the event of a vendor’s default”.
The ATO has indicated that in “the majority of cases” the variation will be provided within 28 days.
The 10 per cent withholding tax must be paid to the ATO on or before the day of settlement. The ATO has indicated, however, that purchasers will be given a few days leniency in this respect so as to alleviate any issues at settlement.
The purchaser is liable for a penalty of the amount of the withholding if the amount is not paid. If the purchaser is a company the directors can be personally liable.
Other practical issues
Where an amount is withheld, the purchaser is required to complete an online ‘Purchaser Payment Notification’ form to provide to the ATO details of the vendor, purchaser and the asset being acquired. The purchaser will then automatically receive a payment reference number.
Parties considering transactions involving direct or indirect interests in land should consider how the proposed regime will impact their transaction.