The new foreign resident capital gains withholding payments have added new compliance burdens for conveyancers.
The Federal Government introduced new legislation for foreign resident capital gains tax withholding payments commencing 1 July 2016. The new CGT withholding regime affects more than just foreign residents.
Whilst the aim of the new legislation, the Tax and Superannuation Laws Amendment (2015 Measures No.6) Act 2015, 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 obligations unless they apply for, and provide to the purchaser, a clearance certificate from the Australian Taxation Office at or prior to settlement proving that they are an Australian resident taxpayer.
Implications for vendors and purchasers
All vendors selling real estate worth $2 million or more are treated as a relevant foreign resident unless they provide the purchaser with a clearance certificate issued by the Australian Taxation Office. Real estate includes vacant land, residential and commercial property – no exceptions. All purchasers of such real estate must withhold 10 percent of the purchase price unless they are given a clearance certificate by the vendor.
Whilst the anticipated tax requires a prepayment from the vendor, the obligation to withhold and pay 10% to the Australian Taxation Office actually passes to the purchaser. Where the purchaser fails to comply with the measure, it is the purchaser, not the vendor, who is potentially liable to the Australian Taxation Office for the amount which should have been withheld and paid, together with interest for late payment.
An application for a clearance certificate should be made as soon as possible. Leaving your application too late may cause delays in settlement. A clearance certificate is valid for 12 months and can be used by the vendor for multiple transactions. There is no fee payable to the Australian Taxation Office for a clearance certificate application.
In the event that the vendor is not entitled to a clearance certificate the purchaser must remit 10 percent to the Australian Taxation Office unless the vendor provides a notice of variation. The vendor may apply for a variation online by completing a variation application for foreign resident’s form, where they believe that a withholding tax of 10 percent is inappropriate e.g. there has been no capital gain or the taxable capital gain is less than the 10% that would otherwise be withheld.
The legislation also applies to indirect Australian real property interests such as an acquisition indirectly from companies, partnership and trusts including company title interests and deceased estates.
The Law Institute of Victoria has prepared a new Special Condition 1B to be inserted in the Contract of Sale to provide the best possible security to ensure payment of the withholding tax.
The potential consequence for a purchaser of non-compliance are significant.