What is the change?
On Friday July 1 2016, the rules for all transacting dwellings and commercial property worth over $2 million will change. A 10% non-final Capital Gains Withholding tax will be incurred on these transactions at settlement. This will affect all transactions and including those by Australian Residents
The new legislation imposes an obligation on purchasers to withhold 10% of the purchase price and pay it to the ATO where a seller enters a contract after 1 July 2016.
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How is this different?
Foreign Residents are currently required to lodge an income tax return and pay tax in respect of any Australian assessable capital gain. The new withholding obligations with effect from July seeks to address the current low levels of compliance with this obligation.
How does the Capital Gain Withholding tax apply?
- Real Property situated in Australia (including lease of land) worth over $2 million market value
- A non-portfolio interest in an entity whose assets comprise of more than 50% Australian real property by market value
- An option or right to acquire such property or interest
Relevant Foreign Resident
A relevant foreign resident is generally a person or entity that is not an Australian resident for tax purposes. Do note that under the new regime, any Australian resident seller involved in transactions of over $2 million is considered a relevant foreign resident. You will have to apply for exemptions to be excluded from the tax.
How will this impact me?
Australian Resident Vendor
The withholding tax will apply to Australian Residents. If you sell a property that exceeds $2 million, you can avoid the 10% withholding by providing a clearance certification to the purchaser prior to settlement. The clearance certificate will attest that there is nothing to suggest that you are or will be a foreign resident. The ATO has estimated that certificates can be provided within 1-14 days of application.
For assets other than real property and company title interests, vendors can apply for a vendor declaration that confirms that the vendor is not a relevant foreign resident
Foreign Resident Vendors
The withholding tax will apply to Foreign Resident vendors involved in property transactions exceeding $2 million dollars. You may apply for a variation of the withholding rate. The reasons for variation include
- You will not make a capital gain on the disposal of the asset
- You will not otherwise have an income tax liability
- There are multiple vendors and only one of you is a foreign resident
You make also make a declaration that a membership interest is not an indirect Australian real property.
If the property transaction exceeds $2million dollars in value, you must pay the 10% withheld before or on the day of settlement to the commissioner unless your vendor provides you with a clearance or vendor certification.
What are the next steps?
If you are regularly involved in the sale or purchase of relevant assets captured under the new withholding tax, you should consider how you will deal with the change. You may need to update your standard form documentation to include residency declarations or inform your clients to supply an ATO clearance certificate. You should also review your conveyancing process to ensure additional steps such as acquiring an ATO clearance certificate is incorporated and accounted for in a timely manner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Please contact Verity Law for further advice.