Foreign resident capital gains withholding payments
The 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property has now passed the Senate and awaits Royal Assent.
The new withholding regime will apply to contracts entered into on or after 1 July 2016.
Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold and pay to the Australian Taxation Office (ATO) 10% of the proceeds from the sale.
This withholding is limited to taxable Australian property, being:
•Real property in Australia – land, buildings, residential and commercial property;
•Mining, quarrying or prospecting rights;
•Interests in Australian entities that predominantly have such assets – this is called an indirect interest.
Although mainly aimed to protect tax on capital gains made by non-residents, it also applies if the gain is on revenue account.
There are a number of exclusions. If the foreign resident vendor falls within one of these categories then the 10% withholding is not applicable:
•The new withholding regime will not apply to real property transactions valued under $2 million, ensuring that the vast majority of residential house sales will be unaffected by this measure;
•Transactions on an approved stock exchange;
•The foreign resident vendor is under external administration or in bankruptcy.
The Bill introduces a clearance certificate model to provide certainty to purchasers regarding their withholding obligations. The clearance certificate confirms that the withholding tax is not to be withheld from the transaction.
For real property transactions valued above $2 million, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO. This certificate can be provided 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 vendor fails to provide the certificate by settlement, the purchaser would be required to withhold 10% of the purchase price and pay this to the ATO.
The vendor may apply for a clearance certificate at any time at which they are considering the disposal of real property. This can be before the property is listed for sale and is valid for 12 months.
The ATO is implementing an ‘automated’ process for issuing a clearance certificate from withholding. This would involve:
•the vendor (or their agent) completing an online application form;
•the information on the application being automatically checked against information held by the ATO to assess if the vendor should be treated as an Australian tax resident for the purposes of the transaction; and
•the automatic issuance of a clearance certificate which removes the need for the purchaser to withhold the 10% from the sale proceeds.
Paying and reporting withholding amounts
Where a withholding obligation exists, the purchaser must pay the withholding amount to the ATO at settlement (i.e. 10% of the purchase price).The penalty for failing to withhold is equal to the amount that was required to be withheld and paid.
Where an amount is withheld, the purchaser is required to complete a ‘Purchaser Remittance Form’ and to provide details of the vendor, purchaser and the asset acquired to the ATO.