Our Federal Parliament has today passed legislation aimed at collecting capital gains tax from foreign residents selling land for more than $2 million.
However, in a wide cast of the CGT tax net, all sellers in these larger transactions are potentially affected – not just foreign sellers. For all property sales of $2 million or more, unless the seller obtains a clearance certificate from the ATO before settlement, the buyer is required to withhold 10% of the sale proceeds and remit that amount to the ATO. Sellers may need Contracts amended to reflect the ATO’s processing time for providing clearance certificates. Buyers who are utilising vendor-finance will need to allow for this impact on their cash-flow.
What is the relevant date?
Contracts for the transfer of property entered into on or after 1 July 2016 will be affected by the new regime.
Which assets can be affected?
Affected assets include:
- Australian real property, including interests in mining tenements (‘TARP’) (TARP is the ATO acronym for Taxable Australian Real Property).
- An indirect interest in Australian real property (a holding of more than 10% in an entity whose majority assets by market value are Australian real property).
- An option or right to acquire either of these assets.
Which acquisitions are excluded?
Certain acquisitions are excluded from the new withholding regime, including:
- Real property transactions valued at under $2 million;
- Transactions conducted through an approved stock exchange; and
- Sales, where the seller has obtained a clearance certificate from the Commissioner, is obtained before settlement.
Where there are multiple sellers, the buyer’s obligation to pay an amount will arise if any of the sellers is a relevant foreign resident.
Who is a relevant foreign resident?
Given that the question of residency is not something a buyer can easily determine, the legislation provides for assumptions on which a buyer can rely when determining whether they are required to remit an amount to the ATO. If the asset is real property, a clearance certificate which states that the Seller is a resident must be obtained from the ATO before settlement. Otherwise, the new law requires the buyer to assume that the Seller is a non-resident and the buyer must:
- withhold 10% of the sale proceeds from the seller; and
- register with the ATO, complete a Purchaser Remittance Form and provide details of the seller, the buyer and the asset acquired.
Failure to withhold an amount will result in the Buyer paying a penalty equal to the amount that was required to be withheld.
When can a Seller obtain a clearance certificate?
The Commissioner has indicated that in “straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within 1 – 14 days”. However, in other situations, it could take 28 days or longer to obtain a clearance certificate. Refer to ATO website
Must the amount withheld be 10%?
The Commissioner has a discretionary power to vary the amount payable on application by either the seller or the buyer. A variation may be sought in circumstances such as where no capital gain is made, the tax payable on assessment would be less than 10% of the sale price or the gain is reduced under a CGT rollover.