New ‘Foreign Resident’ Capital Gains Tax Withholding regime

capital-gains-tax3By Andrew Smith, Tucker & Cowen, Lawyers, Brisbane.

As of 1 July 2016, a transferee of direct or indirect interests in Australian land valued at over $2 million may be required to withhold (and pay to the Australian Taxation Office),10% of the value of the interest on account of potential Capital Gains Tax.

The New ‘Foreign resident’ Capital Gains Tax regime

The new regime, introduced by the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act (Cth) 2016:

  • applies where a foreign resident disposes of Australian land (or interests in Australian land) valued at over $2 million; and
  • provides that the purchaser of the Australian land (or interests in Australian land) is required to pay to the Australian Taxation Office (“ATO”) 10% of the value of the land on account of potential capital gains tax (“the new regime”)

The new regime also applies to the transfer of indirect interests in Australian land, including the transfers of shares in land rich companies or units in land rich unit trusts. Different rules apply in these circumstances.

Importantly, Australian resident sellers (including companies and trusts) are deemed to be ‘foreign residents’ for the purpose of the new regime unless they have obtained a clearance certificate (“Certificate”) before settlement or such earlier time as prescribed in the contract of sale.

Clearance Certificates for Australian residents

Australian resident sellers can apply online for a Certificate from the ATO at no charge. Once issued, the Certificate lasts for 12 months. The Certificate confirms that the seller is not a ‘foreign resident’ for the purpose of the new regime. As such, whilst the Certificate remains current, the seller will not be subject to CGT withholding tax obligations for land sale transactions.

If an Australian resident seller does not hold a current Certificate at the time of sale, the seller will be deemed to be a ‘foreign resident’. This oversight could be costly given that in most cases, standard contractual terms will give a purchaser rights to redirect 10% of the purchase price to the ATO on account of withholding tax (which could have been avoided if the Australian resident seller obtained a Certificate).

Note: This article discusses the impact of the new regime on sale transactions. However, the new regime is not confined to “sales” as it can potentially apply to transfers of land for which there is no cash consideration, such as gifts, matrimonial property settlements, deceased estate distributions and in-specie trust distributions.

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