Overview
The Tax and Superannuation Laws Amendment (2015 Measures No.6) Act 2016 (Cth) came into effect on 1 July 2016.
This new legislation has been designed to assist the Australian Taxation Office (“ATO”) in recovering capital gains tax (“CGT”) liabilities of foreign residents in certain property transactions, an area where traditionally, compliance has been very low due to practical and enforcement difficulties.
With this new legislation, new obligations are placed upon vendors, purchasers and their respective lawyers in property transactions that are deemed to be “Applicable Transactions”.
In very broad terms, a purchaser who, via an Applicable Transaction, purchases certain property from a vendor who is a “foreign person” must retain ten percent (10%) of the purchase price (“the Withholding Amount”) on settlement and pay that amount to the ATO.
Post settlement, the vendor is then entitled to apply for an input tax credit for the amount withheld, in respect of any capital gains tax liability arising from the Applicable Transaction.
It is imperative that vendors, purchasers and their solicitors familiarise themselves with this new legislation as there are new procedures to be followed and penalties apply in the event of non-compliance.
Who is the Vendor?
The vendor is the legal owner of the property or asset in question, whose name appears on all title and ownership documents.
In respect of assets that are owned by a trust, the vendor is the trustee or custodian who holds legal title in the asset on behalf of the beneficiaries.
What is an Applicable Transaction?
All transactions where the higher of the market value or the purchase price exceeds $2,000,000.00 (“the threshold”) are deemed to be Applicable Transactions.
An Applicable Transaction is defined as a transaction involving one of the following, for which an Exemption (discussed below) does not apply:-
- all real property transactions, including, without limitation, those involving land, buildings, residential and commercial property above the threshold;
- leases of the above;
- mining or prospecting rights in respect of minerals, petroleum or quarry materials;
- indirect interests – such as a membership or shareholding of ten percent (10%) or more in an Australian entity whose primary assets consist of real property above the threshold; or
- options or rights to acquire any of the above.
In terms of the threshold, in all arms-length transactions, the purchase price and the market value will usually be the same.
However, in any transaction where the purchase price is not the current market value (for example in a trade deal or a transaction involving related parties), it may be necessary to obtain evidence of the market value of the property in question.
Outgoings or disbursements at settlement are not factored into the threshold (eg for council rates, water and sewer charges or body levies). Therefore, the withholding amount is 10% of the purchase price before adjustment for disbursements.
Rent payable under a lease does not constitute an Applicable Transaction and is not subject to the 10% withholding rate. In relation to Leases, the withholding obligation only arises in respect of lease premiums paid for the grant of the lease and not on rent payable under the lease.
In relation to options, when the option is first granted or entered into, the purchaser must retain the 10% Withholding Amount in respect of any option fee. Subsequently when the option is exercised, the amount to be paid is 10% of the total consideration less any payments the purchaser has already made. Any premiums payable for renewals or extensions of the option terms are also subject to the Withholding Amount.
The obligation to withhold will also apply to options that are granted before commencement of this new legislation on 1 July 2016, for which the option will not be exercised and the contract of sale will not be entered into until after that date.
GST and market value
If the supply of the asset or property would be a taxable supply and the purchaser is registered for GST and entitled to claim an input tax credit for the supply (for example if they are acquiring the asset or property as part of carrying on an enterprise), the market value is assessed on the GST inclusive purchase price, less the input tax credit.
If any of the above are not met (ie the purchaser is not registered for GST on settlement or is not entitled to any input tax credit) the GST inclusive purchase price may be used as a proxy for market value.
Who is a ‘foreign person’?
A foreign person is a person who has neither domiciled nor resided in Australia for more than six (6) months of the financial year, prior to the sale.
A company is a foreign person if it has not been incorporated in Australia or does not have an Australian Company Number (“ACN”), unless it carries on business in Australia and either has a registered office in Australia or has a director or a shareholder residing in Australia.
A vendor is a foreign person if:
- the purchaser knows or has reasonable grounds to believe the vendor is a foreign person. For example, a reasonable belief can arise when a vendor lives overseas and has an address outside of Australia or the purchase monies are to be paid to a place outside of Australia;
- they have not made a declaration to the purchaser that they are an Australian resident or are carrying on a business through an Australian permanent establishment; and/or
- where the asset is membership interests (for example shares in a company), the vendor has not declared that the interests are not indirect Australian real property interests.
Exemptions
There is no Withholding Amount and the new legislation does not apply to Australian resident vendors, who are entitled to:-
- In relation to an Applicable Transaction involving real property, obtain a Clearance Certificate to ensure that their transactions do not incur the obligation to pay the Withholding Amount to the ATO on settlement; or
- In relation to the other Asset Types listed below, provide a Vendor Declaration that they are not a foreign resident, which we expect will become common practice in the terms or clauses of the contract of sale.
Also, the new legislation does not apply to:-
- Property transactions where the property or asset has a market value or purchase price (whichever is the higher) of less than $2,000,000.00;
- Transactions that are listed or undertaken on an approved stock exchange;
- Transactions where the foreign person vendor is bankrupt, under external administration or similar;
- The transaction is conducted using a broker-operated crossing system, such as a ‘dark pool’, as described in the ASIC Market Integrity Rules (ASX Market) 2010;
- Another withholding obligation already exists in respect of the transaction;
- The transaction constitutes a securities lending arrangement for which a CGT rollover is available.
Clearance Certificates & Variation Notices
A valid clearance certificate (which applies to real property only) issued by the ATO prior to settlement permits the entire purchase price to be paid to the vendor upon settlement and the purchaser is not required to retain the Withholding Amount.
The vendor may apply for a clearance certificate at any time they are considering the disposal of the real property. This can even be before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the purchaser prior to settlement.
The name of the Vendor on the certificate must be checked carefully to ensure that it matches the name of the Vendor on the asset being transferred.
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, thereby requesting a lesser withholding rate be determined by the ATO. This will be the procedure for transactions not involving real property.
The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies and the purchaser does not remit the full 10% Withholding Amount to the ATO.
Forms and Payments
The purchaser needs to pay the Withholding Amount, or the amount stated in the variation notice on or before settlement. The ATO’s preference is electronic payment (funds transfer), however the purchaser can choose to pay the withheld amount at a post office with the barcode, or they can mail a cheque to the ATO with the payment reference number.
The ATO has published three forms online in respect of the new legislation which are available at ato.gov.au/FRCGW. These are:
- Clearance certificate application for Australian residents;
- Rate Variation application for foreign residents and other parties; and
- Purchaser payment notification.
The ‘purchaser payment notification’ form ought to be used to provide details of the transaction to the ATO, such as the vendor, purchaser and the asset being acquired.
The purchaser will then automatically receive a payment reference number, and a payment slip which includes a barcode for use if paying the Withholding Amount in person at Australia Post.
Penalties and Non-Compliance
The Withholding Amount must be paid by the purchaser to the ATO on or before settlement and the penalty for failing to withhold is equal to the amount that was required to be withheld and paid.
General Interest Charges (“GIC”) and administrative penalties may also be imposed.
Recommendations
1. The new legislation creates a presumption that the regime applies unless a clearance certificate or a variation notice is obtained. Therefore, if you are an Australian resident vendor and you intend to sell property in an Applicable transaction above the $2,000,000.00 threshold, it is recommended that you obtain a Clearance Certificate prior to entry into the Contract to displace this presumption.
2. From a purchaser’s perspective, it is important that any contract of sale in an Applicable Transaction over the threshold contains specific provisions that:-
- a. Declare whether or not the vendor is a foreign person;
- b. State whether the regime may or may not apply;
- c. State whether a clearance certificate is available or will be obtained prior to settlement; and
- d. Entitle the purchaser to retain the Withholding amount and remit same to the ATO on settlement.
3. Indemnities should also be considered. Without limitation, such indemnities may be in respect of:-
- a. False or misleading statements made by the vendor or any incident of non-compliance with the regime; or
- b. Failure to remit the Withholding Amount to the ATO on settlement.
4. Regulatory bodies such as the Real Estate Institute of Queensland (“REIQ”) have updated their standard form of Contracts for real estate transactions so as to account for the new legislation. The changes to these Contracts include, without limitation:-
- If the Contract is in respect of an Applicable Transaction and neither a clearance certificate or variation notice is given prior to settlement, the Buyer is irrevocably authorised to draw a bank cheque or retain the 10% Withholding Amount in a solicitor’s trust account;
- The Buyer must also complete a Purchaser Payment Notification form, lodge same with the ATO and supply copies of the payment reference numbers to the Seller on or before Settlement.
- The Buyer must pay the Withholding Amount to the ATO and supply the Seller with evidence of same within two (2) Business Days of Settlement.
For a full list of all changes to these contracts, please visit the following link:-
http://www.qls.com.au/About_QLS/News_media/News/REIQ_contracts_update_%E2%80%93_comparison_tables_available
Further Information
Marino law has extensive experience acting for both vendors and purchasers in ‘high end’ property transactions of any nature, including those transactions that are now caught by the new legislation covered in this article.
Should you have any concerns regarding how this new legislation may affect you or you are considering entering into any property transaction that may be caught where the market value or purchase price exceeds $2,000,000.00, please contact one of our highly experienced property lawyers for advice as to how the new legislation may affect such a transaction.
