On 1 July 2016 Schedule 2 of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015, will come into effect. The legislation aims to increase compliance of Australia’s foreign resident capital gains tax (CGT) regime by shifting the burden from the ATO and the foreign individual to purchasers.
Under the new regime, when a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and pay to the ATO 10% of the proceeds from the sale. The purpose of the regime is to assist in the collection of foreign residents’ CGT liabilities.
Taxable Property will include:
Direct taxable Australian real property
Residential real estate
Indirect taxable real property
Shares in a company or units in a trust where:
- the interest is more than 10 per cent of the shares or trust units on issue, and
- the total market value of underlying assets of the company or trust related to real property are more than the total value of the underlying assets unrelated to real property
Asset used in carrying on a business
Business real property
The new system will only apply to real property valued over $2 million dollars, meaning the majority of property transaction will not be affected. However the impact will likely be felt in capital city markets, in particular Sydney where properties valued above the threshold are more abundant.
From a practical point of view the legislation is problematic as it adds further compliance costs for both parties and exposes the purchaser to liability for the failure of the vendor to pay their personal tax liabilities.
Generally speaking the system will require the vendor to provide the purchaser with a clearance certificate from the ATO so as to ensure that no funds are withheld by the purchaser from the proceeds of sale. This may result in delayed settlements if the ATO are unable to provide certificates in a timely manner or if vendors were unaware of the requirement. Fortunately applications can be made prior to listing of the property and the certificate lasts for 12 months.
If the Vendor does not provide a clearance certificate than the purchaser is required to withhold 10% of the purchase price and pay this to the ATO on the day of settlement. This may be problematic from a practical point as payment is usually only made on settlement in the form of Bank Cheques, meaning payment to the ATO would only be made upon their receipt of the cheque which may be some days after settlement.
Exemptions to the withholding requirements may apply for assets other than real property, for example:
- Where the purchaser does not know or have reasonable grounds to believe that the vendor is a foreign resident (the “knowledge condition”);
- Where the Vendor makes a declaration that they are an Australian resident (“vendor declaration”); or
- Where, if the CGT asset acquired is a membership interest (for example, shares in a company), the Vendor makes a declaration that the interest is not an IARPI and the purchaser does not know the declaration to be false (“interests declaration”).