CGT withholding rules

By Stuart Dall - June 21, 2016

With less than a month to go until the commencement of the foreign resident capital gains tax (CGT) withholding regime, now is an opportune time to consider the actions you may need to take in relation to proposed sales of certain Australian property assets.

Broadly, the new provisions will apply to any purchase from 1 July 2016 of real property with a market value exceeding $2m, or a >10% indirect interest in real property through a land-rich entity. Importantly, unless clearance is obtained by vendors to prove they are not foreign residents, 10% of the purchase price must be withheld by the purchaser and remitted to the Australian Taxation Office (ATO) by the date of settlement.  

In respect of the sale of real property directly (as opposed to indirect interests), such clearance will be provided in the form of a certificate from the ATO, which will be valid for 12 months.  

What actions should be taken by Australian resident vendors?

Australian resident vendors contemplating a relevant sale within the next few months should be seeking clearance certification from the ATO as soon as possible.

The ATO has released a paper version of the application form, which we expect will be of particular interest to those vendors contemplating transactions shortly after the provisions enter into force. From 27 June 2016, the ATO intends to provide an online version of the application form.

The application form contains a number of questions, and while the questions may appear straightforward, we would expect the accuracy of its completion to impact processing times. The ATO have indicated that a clearance certificate may be issued within a few days in respect of automatic approvals, however applications with data irregularities will have a turnaround of 28 days and those in a higher risk category could potentially take even longer.

Once a clearance certificate is obtained, it must be provided to the purchaser on or before settlement. We recommend that all applications contain an email address so that the certificate can be emailed to vendors to reduce any unanticipated delays through the post.

In the event that a transaction contains multiple vendors, each vendor must obtain their own clearance certificate. A clearance certificate will also be required where a transaction is between members of a tax consolidated group.

What actions should be taken by foreign resident vendors?

The 10% withholding represents a non-final withholding tax and, as such, foreign resident vendors may still be required to lodge an Australian tax return in respect of a gain arising from the disposal of the relevant property, with a credit available in respect of any amount paid to the ATO under these provisions.

How can we assist?

Vendors may have the clearance certificate application completed and lodged on their behalf by a tax agent. For those vendors contemplating entering into a sale in July 2016 we suggest they complete the paper form as soon as possible to minimise the risk of relying on the online system as it is not yet operational and remains untested.

For further information, or for assistance with completion of the clearance certificate application or preparation of a tax return in respect of a relevant property disposal, please contact one of our experts.

 


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