Operation of the foreign resident capital gains withholding system

As we previously advised, where a foreign resident disposes of certain taxable Australian property, the purchaser is required to withhold 10% of the purchase price (as defined) and pay that amount to the Australian Taxation Office (ATO) under legislation enacted and applying to contracts entered into on or after 1 July 2016.

Assets affected

This withholding is limited to taxable Australian property, being:

  • Real property in Australia – land, buildings, residential and commercial property;
  • Lease premiums paid for the grant of a lease over real property in Australia;
  • Mining, quarrying or prospecting rights;
  • Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest;
  • Options or rights to acquire the above property or interest.

Exclusions

There are a number of exclusions. The 10% withholding is not applicable if the foreign resident vendor falls within one of these categories:

  • Real property transactions with a market value under $2 million (ensuring that the vast majority of residential house sales will be unaffected by this measure);
  • Transactions listed on an approved stock exchange;
  • The foreign resident vendor is under external administration or in bankruptcy.

How will this be administered?

Three online forms were made available at ato.gov.au/FRCGW by 30 June 2016. These are:

  1. Clearance certificate application for Australian residents
  2. Rate Variation application for foreign residents and other parties
  3. Purchaser payment notification

Clearance certificates

The clearance certificate confirms that the withholding tax is not to be withheld from the transaction.

For real property transactions with a market value of $2 million or more, 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 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.

This means Australian resident vendors of real property with a market value of $2 million or above will need to apply for a clearance certificate and provide this to the purchaser before settlement to ensure no funds are withheld from the sale proceeds. The vendor may apply for a clearance certificate at any time they are considering the disposal of real property and the clearance certificate will be valid for 12 months. It must be valid at the time the certificate is given to the purchaser prior to settlement.

The ATO has implemented an 'automated' process for issuing a clearance certificate, involving:

  • the vendor (or their agent) completing an online 'Clearance certificate application for Australian residents' 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.

In straightforward cases it is expected that clearance certificates will be provided within days of being submitted. However, if manual processing is required, the clearance certificates will be provided within 14 – 28 days. Higher risk and unusual cases may also require greater manual intervention which could take longer.

Variation application

Where the vendor is not entitled to a clearance certificate, but believes a withholding of 10% is inappropriate, the vendor can apply for a variation. The vendor completes an on-line 'Variation application for foreign residents and other parties' form requesting a lesser withholding rate be determined by the ATO. In the majority of cases (where the ATO has all the required information), the variation will be provided within 28 days. The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.

Paying and reporting withholding amounts

Where a withholding obligation exists, the purchaser must withhold the relevant amount at settlement and pay it to the ATO without delay (general interest charge may apply to late payments). The penalty for failing to withhold is equal to the amount that was required to be withheld and paid. An administrative penalty may also be imposed.

Purchaser payment notification

Where an amount is withheld, the purchaser is required to complete an online ‘Purchaser Payment Notification’ form to provide details of the vendor, purchaser and the asset being acquired to the ATO. The purchaser will then automatically receive a payment reference number, and a payment slip. The purchaser needs to pay the withholding on or before settlement.