By Lachlan Commins, Patterson Houen & Commins, Lawyers, Sydney.
Thinking of buying or selling land or buildings this Spring? Then you should be aware that, starting on 1 July 2016, the sale of all Australian real estate with a market value of $2 million or more will be – unless an exemption applies – subject to the application of the foreign resident capital gains tax withholding regime.
In brief, the regime ensures that foreign residents who dispose of certain “capital gains assets” in Australia pay the appropriate capital gains tax to the ATO, but there are potential traps for purchasers and resident vendors.
As a purchaser, you need to be aware of the following if the regime applies:
- Unless each and every vendor party to the transaction provides you with a ‘clearance certificate’ issued by the ATO, you must withhold a remittance amount equal to 10% of the purchase price of the property (including GST, if any, and any other non-monetary consideration forming the purchase price) and pay this amount to the ATO on or before settlement.
- If you have not received a clearance certificate in respect of each and every vendor, and you fail to withhold the remittance amount, you will be penalised by the ATO in an amount equal to the remittance amount plus interest charges on that amount calculated from the date of settlement, and a further administrative charge.
- To avoid being penalised if no clearance certificate has been provided, you must complete an online ‘Purchaser Payment Notification’ with the ATO. You will then automatically receive a ‘payment reference number’ which you will use to pay the remittance amount to the ATO on or before settlement.
- There is a certain lack of procedural clarity in some sections of the ATO website, but the recent 2016 edition of the standard ‘Contract for the sale and purchase of land’ published by the Law Society of New South Wales and the Real Estate Institute of New South Wales contains a very clear compliance provision as follows:
“31.2 The purchaser must [where the regime applies to the transaction and no clearance certificate has been provided] –
31.2.1 at least 5 days before the date for completion, serve evidence of the purchaser’s submission of a purchaser payment notification to the Australian Tax Office;
31.2.2 produce on completion a settlement cheque for the remittance amount payable to the Deputy Commissioner of Taxation;
31.2.3 forward the settlement cheque to the payee immediately after completion; and
31.2.4 serve evidence of receipt of payment of the remittance amount.”
It is expected that similar provisions will be included in sale/purchase contracts in the other states and territories.
Take out for Purchasers
Well in advance of settlement:
- Make sure that you receive the relevant clearance certificate(s) from the vendor(s), whether or not the vendor is a foreign resident, or, failing this
- Obtain the Purchaser Payment Notification; and
Either before or immediately after settlement has taken place pay the remittance amount to the ATO.
Take out for Vendors
As a vendor, on the other hand, you should be aware that:
- To avoid having the required remittance amount deducted from your purchase price, even if you are an Australian Resident, you must obtain an ATO clearance certificate and provide it to the purchaser. If you don’t, the purchaser must withhold the remittance amount from the purchase price.
- You (or your agent) may at any time during which you are considering the sale of your property, apply online for a clearance certificate from the ATO – that is, even before the property is listed for sale. As the clearance certificate relieves the purchaser from having to withhold the remittance amount, you should do this promptly to avoid any unintended delays to the settlement date on account of a potential hold-up in obtaining the clearance certificate from the ATO.
- To obtain a clearance certificate you (or your agent) will need to complete the ‘Clearance Certificate Application for Australia Residents’ form on the ATO’s website. The clearance certificate will be granted if you are classified as an Australian tax resident for the purposes of the relevant transaction.
- You will be classified as an Australian tax resident for the purposes of the relevant transaction if you meet one of the following tests:
- You ordinarily reside in Australia (the ‘resides test’); or
- You have an Australian domicile (unless the ATO is satisfied you have a permanent place of abode outside Australia) (the ‘domicile test’); or
- You are present in Australia for 183 days or more in a financial year (unless the ATO is satisfied you have a usual place of abode outside Australia) (the ‘183 day test’); or
- You are a member of an Australian government superannuation scheme or a spouse or child under the age of 16 of such a member (the ‘superannuation test’).
- If you are assessed as an Australian tax resident, the clearance certificate will be provided “within days” in most straightforward cases, or within 14 to 28 days where there are “data irregularities or exceptions”. The clearance certificate will be valid for 12 months from the date of issue, and must be valid at the time of settlement of the relevant sale.
- If you are unable to obtain a clearance certificate prior to settlement (if, for example, you are a foreign resident) and you believe that the withholding of the remittance amount would be inappropriate in your case, you may apply to the ATO for a variation by completing an online ‘Variation Application for Foreign Residents and other Parties’ form. If granted, a variation may reduce the level of the remittance amount from the standard 10 per cent, but you must provide the purchaser with the variation certificate prior to settlement. In any event, it is most important that the correct remittance amount be determined as early as possible.
- If the purchaser pays the remittance amount to the ATO before or immediately after settlement, you will nevertheless be entitled to claim the remittance amount as a credit upon lodging your next tax return. This is because the remittance amount constitutes a non-final withholding tax only. However, you will only be entitled to claim the remittance amount as credit as long as the ATO has actually received payment of the remittance amount from the purchaser. Accordingly, it is vital that the purchaser provide you with proof of payment to the ATO of the remittance amount as soon as possible after it is made.
- Vendors should also be aware of the following:
- Where there is more than one vendor a clearance certificate for each vendor must be obtained;
- If any part of the purchase price is to be paid after settlement, the purchaser must still at settlement withhold 10% of the whole purchase price;
- If the property is to be auctioned and it is not certain that the purchase price will be $2 million or more the vendor should still apply for a clearance certificate.
This article is a summary of the more pertinent provisions of the Foreign Resident Capital Gains Tax Withholding Regime as it applies to real property transactions. The Regime also covers transactions involving other types of property (for example, resources leases and property rights). In any event it would be prudent for vendors and purchasers to seek assistance and guidance from their adviser.