The new withholding requirements
In February 2016, new legislation introducing a non-final withholding tax on payments made to foreign residents (including individuals, trusts and companies) that dispose of certain taxable Australian property was enacted.
The new withholding regime will apply to contracts entered into on or after 1 July 2016.
Broadly, if the transaction involves certain taxable Australian property (outlined below), the purchaser is required to withhold 10% of the purchase price. The purchaser must remit that amount to the ATO on or before settlement of the contract.
A withholding obligation arises for acquisitions of:
- Australian real property with a market value of $2 million or greater;
- membership interests (such as shares in a company or units in a unit trust) where the company or unit trust holds Australian real property with total market value greater than 50% of the market value of its total assets (i.e. land rich to greater than 50%); and
- an option or right to acquire either of the above assets.
The new withholding regime is a 'non-final' withholding tax. Vendors will still be required to lodge an Australian income tax return for the relevant year. To the extent that the amount withheld exceeded the income tax that should have been paid, the vendor will be entitled to a refund of the difference. Similarly, to the extent that the amount withheld was insufficient, the vendor will be required to pay any outstanding income tax.
Access the ATO's preliminary guidance on the new withholding regime.
Exclusions from the withholding requirements
The first 'exclusion' is that a purchaser does not need to withhold any amount when acquiring membership interests or options in a land rich entity if the purchaser either:
- does not know if the vendor is a foreign resident; or
- does not have any reason to believe the vendor is a foreign resident.
The following transactions are excluded from the new withholding requirements:
- transactions to acquire Australian real property with market value of less than $2 million. Note that this exclusion does not apply to acquisitions of membership interests or options;
- transactions on an approved stock exchange or broker-operated crossing system;
- for transactions involving Australian real property, where the vendor (or each vendor, if there are more than one) provides a clearance certificate issued by the ATO stating they are an Australian resident;
- for acquisitions of membership interests or options, where the vendor (or each vendor, if there are more than one) provides a declaration in writing that they are an Australian resident or that the company or unit trust being acquired is not land rich to greater than 50%;
- where a request to vary the rate of withholding (which can be to nil) is granted by the ATO; and
- a number of other situations, such as transactions already subject to another withholding obligation, securities lending arrangements and transactions involving a vendor subject to insolvency/bankruptcy proceedings.
Clearance certificates issued by the ATO
As mentioned above, no withholding obligation arises for transactions involving Australian real property if the vendor provides a clearance certificate issued by the ATO stating the vendor is an Australian resident.
This will involve the vendor (or their agent) applying for the clearance certificate online. The ATO will be automating this process and expects clearance certificates to be issued within 1 — 14 days in straightforward cases, with a longer processing time (14 — 28 days, or even longer) for more unusual or higher risk cases.
Clearance certificates can be obtained from the ATO in advance of a transaction and are valid for 12 months. This may be preferable to avoid any potential disruptions to the sale process.
Importantly, this means Australian resident vendors of Australian real property with market value of $2 million or greater, including residential property, will be required to obtain a clearance certificate. Otherwise, the purchaser will have to comply with the withholding obligations.
Variation applications to the ATO
Where the vendor is not entitled to a clearance certificate, but believes withholding 10% of the purchase price is inappropriate, a variation application may be submitted to the ATO (even a variation to nil).
This will involve vendors completing an online form to request that a lower withholding rate be applied by the ATO. The ATO has stated that in the majority of cases, a response to the variation application will be provided within 28 days.
Situations where a variation application would be appropriate include, but are not limited to:
- where the vendor has carried forward capital losses;
- where the vendor knows the capital gain will be less than the amount to be withheld;
- where there are multiple vendors and only one is a foreign resident; and
- where the purchase price is insufficient to discharge the mortgage on the property.
The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.
How to withhold
If an amount is required to be withheld, the purchaser must apply to register as a withholder, complete a 'Purchaser Remittance Form', and then make payment to the ATO on or before the settlement date of the contract.
Vendors should receive evidence of the payment to the ATO by the purchaser to ensure that they are entitled to a credit for the amount withheld in their income tax return.
More information from Maddocks
For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Revenue Practice Group.
More Cleardocs information on related topics
You can read earlier ClearLaw articles on a range of matters.