Capital gains tax rules for foreign investors
Legislative provisions which impose foreign resident capital gains withholding payments in regard to property acquisitions came into effect in July 2016. An updated rate and threshold now applies to contracts entered into after 1 July 2017.
From 1 July 2017 the threshold to withhold has been reduced from $2 million to $750,000 and the withholding rate has been increased from 10% to 12.5%.
Although these provisions are designed to impose withholding payments liability on foreign residents, they effectively impose important obligations on all purchasers and vendors where the transaction is over the threshold amount.
The ATO has said that voluntary compliance with Australia’s foreign resident CGT regime has been poor and now after these changes, when a foreign resident disposes of a certain taxable Australian property, the purchaser will be required to withhold and pay to the ATO 12.5% of the proceeds from the sale. The purpose of the regime is to assist in the collection of foreign residents’ CGT liabilities.
Implications of provisions
The provisions apply to sales of capital gains tax assets, including amongst other things, any sales of direct interests in real estate (or company title interests) valued at $750,000 or more. The threshold amount is based on the market value of the asset.
Obligations imposed under this regime
These provisions appear to impose onerous obligations. Where the value of property exceeds the threshold amount, the purchaser must withhold 12.5% of the price and remit that to the ATO, unless the vendor provides the purchaser with either a “clearance certificate” or a statement from the ATO that a lesser amount is payable.
The vendor can provide the clearance certificate to the purchaser on or before the settlement of the transaction. Where a clearance certificate is provided, the purchaser is not required to withhold an amount from the purchase price.
If the foreign resident vendor falls within one of these exclusion categories, then there is no obligation to withhold the 12.5%:
- Taxable Australian Real Property (TARP) transactions valued under $750,000
- Transactions that are conducted through a stock exchange
- An arrangement that is already subject to an existing withholding obligation
- A securities lending arrangement
- The foreign resident vendor is under external administration or in bankruptcy.
Who has the obligation to remit?
Under these provisions the purchaser has the obligation to remit the withholding payment. The amount to be remitted is to be reconciled against any tax liability of the vendor.
How and when are payments to be remitted?
Generally, the required amount must be paid electronically and is payable on the date of completion of the transaction.
Administration of the provisions
The ATO assesses whether the vendor should be treated as an Australian tax resident for the purposes of the transaction. The assessment is based on information contained in the ‘Clearance certificate application for Australian residents’ form submitted to the ATO by the vendor and information already held by the ATO.
The administration of the regime will primarily use on-line applications, and envisages an automated process for issuing a clearance certificate.
Where no clearance certificate is provided and therefore an amount is withheld, the purchaser must complete an online ‘Purchaser Payment Notification’ form to the ATO, and pay the required amount without delay.
Administrative penalties will apply for false or misleading declarations so it is important that both vendors and purchasers are aware of their obligations under this regime.
Other implications for purchasers and vendors
The new regime is complex and may lead to a delay in completing a transaction if vendors have not applied for clearance certificates in a timely way. There may also be delays in the ATO issuing a clearance certificate where there are data irregularities in information provided and information held by the ATO.
If no completion certificate is provided, the purchaser must withhold the required amount from sale proceeds, regardless of the residency of the vendor.
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