Foreign resident CGT (Capital Gains Tax) Withholding for Real Estate Sales of $2M or More

Quick Summary

• The requirements affect contracts of sale of real estate worth $2 Million or more entered into after 1 July 2016.
• All purchasers of real estate worth $2 Million or more must withhold 10 percent of the purchase price unless they are given a clearance certificate by the vendor.
• Vendors of real estate worth $2 Million or more who are not foreign residents need to apply for a clearance certificate as soon as possible.
• Real estate includes vacant land, residential and commercial property. There are no exceptions.
• IMPORTANT: A purchaser or vendor of real estate worth $2 Million or more MUST obtain tax advice regarding Capital Gains Tax from their accountant or financial adviser BEFORE they sell or purchase such property.

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Introduction

The obligation for purchasers of real estate worth $2 Million or more began on 1 July 2016.

The new withholding tax is brought in by the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015.

• Although the aim of the legislation is to capture unpaid tax from foreign residents, any vendor selling taxable Australian real property worth $2 Million or more will be subject to the withholding tax unless they apply for a clearance certificate and the certificate is provided to the purchaser by the time of settlement.

Why?

The reasoning behind the new law is to capture the tax payable on capital gains by foreign residents that, in the past, has been difficult to recover after the funds from a sale of property go off shore.

Main requirements

A purchaser of real estate worth $2 Million or more will be required to withhold 10% from the purchase price of the property and pay that money to the Australian Taxation Office (ATO).

Failure to do so will render the purchaser liable to penalties and interest!

Exceptions

The legislation provides for a number of exceptions, including the following:

• The CGT asset is taxable Australian real property with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).

• The CGT asset is an indirect Australian real property interest, the holding of which causes a company title interest to arise with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).

• The CGT asset is either taxable Australian real property or an indirect Australian real property interest, the holding of which causes a company title interest to arise, with a market value of $2million or more but the vendor provides the purchaser with  a clearance certificate stating that no withholding tax is required (subparagraph 14-210(2) of the schedule).

• The entity provides a declaration that the CGT asset is a membership interest but not an indirect Australian real property interest and the purchaser is unaware the declaration is false (subparagraphs 14-210(3) and 14-225(2) of the schedule).Provide the name of any planning overlay affecting the land. See section 32C(d)(iv).

(More exceptions can be found in subparagraph 14-215(1) of the schedule to the Act.)

Assets which are caught

A CGT asset for the purpose of withholding is defined in subparagraph 14-200(1)(c) of the schedule as:

• Taxable Australian real property. The Australian Taxation Office (ATO) has given the following examples:
  • land, buildings, both residential and commercial property
  • leases over real property
  • mining, quarrying, prospecting rights.
• An indirect Australian real property interest. This means any interest in an Australian entity whose majority assets consist of taxable Australian real property.
• An option or right to acquire taxable and/or indirect Australian real property.

Market value

The ATO has said that in most cases the market value of an asset will be the purchase price negotiated between a purchaser and vendor, acting at arm’s length as part of a competitive bargaining process. (Acting “at arm’s length” means that the parties to the transaction have not colluded, and the sale price has been properly negotiated in a transparent and business-like manner.)

Vendors of real estate worth near $2 million

If the property you are selling is likely to be sold in the vicinity of $2million or more you must consider the following:

1. If the asset is sold for $2million or more the purchaser is obliged to withhold 10 per cent of the purchase price at settlement and pay it to the ATO unless a clearance certificate is obtained. In other words, the purchaser must pay this amount to the tax office on your behalf.
2. You should apply for a clearance certificate as soon as possible. Leaving it too late may create unnecessary complications in the lead up to and at settlement.
3. If you want us to make the application for you, then you must instruct us in writing to do so (additional costs will apply).
4. The clearance certificate MUST be in the name of the vendor as set out on the Certificate(s) of Title for the property being sold.
5. A copy of the clearance certificate is to be attached to the contract of sale.
6. A special condition must be added to the contract of sale, dealing with the sale by a foreign resident.
7. If withholding tax is payable –
   1. You must take into account whether there is sufficient funds to discharge any mortgages or other encumbrances if 10 percent of the purchase price is withheld.
   2. Where there will not be sufficient funds:
      1. your mortgagee may refuse to discharge the mortgage, and the settlement will be jeopardised; however
      2. you or your lender may be able to apply for a variation of the amount that must be withheld. NOTE: The ATO has indicated it will take 28 days to finalise a variation.
8. Where the purchaser withholds money at settlement you should seek confirmation from the ATO that payment has been made by the purchaser and inform us if you discover that it has not been paid.

Purchasers of real estate worth $2 million

If the purchase price of the property you are purchasing is $2million or more you must consider the following:

1. Check the contract documents for a clearance certificate.
2. If you do receive a clearance certificate read it carefully and check that:
   1. the name on the certificate matches the name of the vendor;
   2. the settlement date falls within the period covered by the certificate; and
   3. the certificate is genuine. This is done by using the verification procedure which the ATO is making available.
3. If you have not received a clearance certificate in the lead up to settlement:
   1. we must register the purchaser as a withholder; and
   2. include the amount payable to the ATO for 10 per cent in the list of payments to be drawn from the settlement funds.
4. The ATO is expecting an electronic payment but may allow alternative forms of payment. Where the ATO allows payment by cheque, take any cheque for the ATO to settlement so the vendor can take a copy.
5. Promptly make electronic payment or send the cheque to the ATO after settlement.
6. The legislation provides that the purchaser must pay the required amount to the ATO on or before the day the purchaser becomes the owner of the property. See subparagraph 14-200(2). However the ATO has indicated that the Commissioner will administratively allow a short period after settlement to receive payment before imposing general interest charges and initiating recovery action.

ATO forms and further information

Further information can be found at the ATO’s website here.

According to the ATO three online forms will be made available at www.ato.gov.au/FRCGW before 30 June 2016. These are:

1. Clearance certificate application for Australian residents.
2. Variation application for foreign residents.
3. Purchaser payment notification. (This form is used to register the purchaser as a withholder).