CGT Withholding Changes from July 1st : How Does it Impact You?
Vendors disposing of certain taxable property under contracts entered from 1 July 2017 will be faced with new rules for foreign resident capital gains withholding (FRCGW). The changes apply to real property disposals where the contract price is $750,000 and above (previously $2 million) and the FRCGW withholding tax rate will be 12.5% (previously 10%). The existing threshold and rate will apply for any contracts that are entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017. This will not only affect foreign residents, BUT also Australian residents selling properties above this value. The decrease of the contract price threshold will put more Australian Vendors under the obligation to apply for clearance to ensure their purchase price is not retained at settlement, and can be fully released to them.
HOW WILL THE CGT WITHHOLDING REGIME AFFECT YOU?
Under the new regime, any person accepting a transfer of certain Australian assets from a relevant “foreign resident” is required to withhold and remit 12.5% (currently 10%) of the purchase price to the Commissioner of Taxation (Commissioner).
It is important to note that whilst the withholding amount is paid to the Commissioner, affected vendors will be able to claim a credit for the withholding amount when lodging their tax return. This is to ensure that foreign residents comply with their existing obligations to lodge tax returns and pay any assessable capital gains tax (CGT).
Assets to which the regime applies*
The legislation applies to the following asset types:
- real property
- taxable Australian real property with a market value** of $750,000 or more
- vacant land, buildings, residential and commercial property
- a lease over real property in Australia.
- other assets
- indirect Australian real property interests in Australian entities, whose majority of assets consist of the above asset types
- options or rights to acquire any of the above asset types
** In many cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, the Australian Taxation Office (ATO) will accept the purchase price as a proxy for market value.
Some assets are not subject to the withholding including:
- taxable Australian real property with a market value of less than $750,000. This ensures the vast majority of residential house sales will be unaffected by this measure
- an indirect Australian real property interest providing a company title interest with a market value of less than $750,000
** Please refer to ATO’s website for a full listing of included and excluded assets.
How much is payable
The actual amount that must be withheld and paid to the ATO is equal to 12.5% of the first element of the CGT asset’s cost base (i.e. normally the purchase price), less any option fee paid by the purchaser in respect of the asset (including any renewal or extension fees) (CGT Amount). The CGT Amount must be paid on or before the date of settlement of the transaction. To ensure compliance, where a purchaser fails to withhold the CGT Amount, the ATO will impose penalties on the purchaser equal to the CGT Amount plus interest.
In addition to the above a purchaser, a foreign resident vendor or a secured creditor of the vendor may make an application to the ATO for the CGT Amount to be varied in respect of a particular transaction.
The relevant application form can be completed and lodged online from the ATO website. It should be noted that the clearance certificates:
- will remain valid for 12 months from the date of issue;
- will generally be provided automatically but if there are any errors or irregularities may take anywhere between 14 to 28 days. It should be noted that high risk or unusual transactions, may take greater than 28 days due to the manual nature of processing such requests;
- can be provided at any time during the transaction but must be provided before completion;
- where a transaction concerns multiple vendors, each vendor must obtain their own clearance certificate; and
- Where the vendor is a trustee, the clearance certificate must be in the name of the trustee not the trust.
What if the Contract is longer than 12 months?
In circumstances where an off-the-plan property is purchased and the settlement period is greater than 12 months which would have gone past the expiry date on the vendor’s clearance certificate, the purchaser may rely on the clearance certificate being valid as long as the date it's made available to the purchaser, is within the clearance certificate period stated on the certificate.
Key impacts of the new requirements
Where the transaction being proposed does not fall within any of the exemptions listed above, Applications for clearance certificates or any variations of the CGT Amount will need to be made as early as possible to ensure that the certificate is available either before or at settlement.
- Special conditions and warranties are inserted into the relevant contracts to ensure vendors and purchasers are protected from the penalties imposed under the regime and to ensure that the Purchaser is able to withhold the correct amount at settlement and preventing the amount payable from being grossed up to take into account the withholding tax amount.
- The purchaser’s due diligence investigations determine the residency of the vendor and the reliability of any declaration given by the vendor.
- Creditors and vendors consider whether a variation of the CGT Amount will be required to ensure that the proceeds of a sale by the vendor will be sufficient to ensure a full release of the security over the property.
- Creditors identify how the regime will impact their ability to recover the amounts owing as whilst there is provision for the ATO to vary the CGT amount owing, there are no express protections granted for creditors.
What happens if the Contract doesn’t settle?
If for some unforeseen reason the Contract is not settled, there is no obligation on the purchaser to withhold as the vendor has not received the agreed purchase price for the asset.
Who is liable to pay the withholding?
The purchaser is liable to withhold and pay the amount. If this does not occur when it should, the ATO will hold the purchaser liable.
Please do not hesitate to contact us if you require legal advice or services, or if you would like to know more about the CGT withholding tax regime. Our legal team is ever willing to provide you with legal advice and support whenever you need it.