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A closer look: Foreign Resident CGT Withholding

In short: The Income Tax Assessment Act 1997 (Cth) (“ITAA 97”) and the Tax Administration Act 1953 (Cth) (“TA 53”) have been amended by the Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015 (“Foreign Resident CGT Amendment”) to reduce the withholding threshold from $2 million to $750,000 and increase the rate of withholding from 10% to 12.5%.

Background

The Foreign Resident CGT Amendment was introduced to amend the ITAA 97 and the TA 53. The proposal was introduced in the Abbott government’s 2013/14 Budget. The amendment introduced a new CGT collection mechanism which increased the rate of withholding from 10% to 12.5% and reduced the market value threshold from $2 million to $750,000. This amendment inserted subdivision 14-D into the TA 53, these amendments apply from 1 July 2017.[1]

This amendment sought to improve the extremely low voluntary compliance rate by foreign residents with the current income tax law.[2] The new provision relates to the non-final withholding tax obligation on the vendor of Taxable Australian Real Property (“TARP”), unless a relevant exemption applies. TARP under s855-20 Income Tax Administration Act 1936 (“ITAA 36”),[3] is real property situated in Australia (including a lease of land), or a mining, prospecting or quarrying right (apart from a right that is not assigned to real property), if the minerals, petroleum or quarry materials are located in Australia.

Taxable Australian Real Property

In respects to the acquisition of TARP or an option to purchase TARP, the new amendments apply provided that the purchaser becomes the owner of the TARP or of the option (and can include purchases from multiple entities or transactions) and, at least one of those entities (at the time) were foreign residents. This is subject to exclusions under s14-200 (1) of Sch 1 TA 53. The Commissioner is entitled to an amount if, the purchaser becomes the owner of a relevant CGT asset as a result of acquiring it under one or more ‘transactions’.

Relevant Foreign Residents (14-210)

Under Subsection 6(1) ITAA 36 a foreign resident is a person other than a resident (subsection 995-1(1) of ITAA 97). A ‘resident’ is a person or entity; that is domiciled in Australia, or present in Australia for at least half an income year and doesn’t have a permanent place of abode outside Australia. Diagram 1 provides an easy step by step guide to determining whether a person is a foreign resident.

Are you dealing with a relevant foreign resident? [4]

 

The ‘Knowledge Condition’ means that ‘the purchaser knows or has reason to believe the vendor is a foreign resident’. It is only relevant for acquisitions of indirect Australian real property interests (other than company title interests).[5] Refer to the explanatory memorandum linked below for more information.

Transactions

For the Foreign Resident CGT Amendment to apply, the purchaser must become the owner of a CGT asset by way of acquiring it through one or more transactions. A ‘transaction’ is defined as ‘1. an instance of buying or selling something, 1.1 the action of conducting business and 1.2 an exchange or interaction between people’. (Oxford English Dictionary)

Excluded Transactions (s14-215)

The regime applies to include any sales of direct interests of real estate, subject to the threshold based on the market value of the asset. It is important to note that where the market value is precisely the threshold figure, i.e. what the purchaser initially paid, the withholding obligations will apply.

Commissioner Clearance Certificates (14-220)

The Commissioner, based on the information available, may certify that the entity or person is, was or will be a foreign resident during a specified period. To apply for a clearance certificate; the applications must be in the approved form (ATO has application forms for clearance certificates through their website), be in writing and apply only for purposes under subdivision 14-220.

Entity Declarations (14-225)

An entity is able to submit a declaration, in writing, which states that for a specified period the entity is or was an Australian resident, and that an asset is a membership interest and not an indirect Australian real property interest. The specified period must not include days later than 6 months after the day the declaration is made. Further, a declaration is not considered a legislative instrument. There are administrative penalties for false or misleading declarations (s14-230). Penalties up to 120 penalty units may apply.

Important to Note:

It is important to note that the obligation to remit resides with the purchaser. The threshold does not apply to options or ‘indirect’ transactions. The new foreign residency CGT changes have seen further changes to the 2016 NSW Land Contract. These amendments have made inclusions for clearance certificates and definitions (including changing the appropriate withholding figure to 12.5%).

Further, relevant transactions which give rise to a CGT withholding obligation aren’t confined to situations where the sale of land occurs. Wherever a change in ownership of land results a transaction will be deemed to have occurred. Therefore, it is prudent to practice obtaining a clearance certificate from the Commissioner when dealing with property.

An Example

Ryan, a foreign resident under Subsection 6(1) ITAA 36, owns a house in Leichardt, Sydney which he purchased in 1999. He used this house as his main residence until deciding to move his family down to Melbourne. He entered into a contract for the sale of this house with Joe in May 2017 for $1.5million.

Joe would not be required to withhold an amount as he would be taken to have acquired the house before 1 July 2017, and therefore falls well within the $2million threshold.

However, if Ryan entered into a contract with Joe to sell the house on 2 July 2017, he would be considered as owner of the house post 1 July 2017 and therefore well over the $750,000 threshold. In this case, Ryan would need to apply for a clearance certificate with the Commissioner and supply this to the Joe, to avoid a 12.5% withholding by the purchaser.

Conclusion

The Foreign Resident CGT Withholding Amendment has significantly changed the landscape of the ITAA 97 and TA 53. The ATO has sought to increase the compliance rate by lowering the withholding threshold and making foreign residents withhold more tax. Whether this increases compliance rates and tax earnings over the long run will be interesting to observe.

Further Reading

Explanatory Memorandum of Foreign Resident CGT Amendment Bill: http://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r5585_ems_8f4187d8-4887-4ea4-9b40-074519a6f7af/upload_pdf/504384.pdf;fileType=application%2Fpdf  

ATO: Foreign Resident Capital Gains Withholding – Common Questions:

https://www.ato.gov.au/general/capital-gains-tax/in-detail/calculating-a-capital-gain-or-loss/foreign-resident-capital-gains-withholding-payments—common-questions/

 

[1] (item 4, sch 1 of the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017)

[2] Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015 (Cth) 41 [2.2].

[3] Income Tax Assessment Act 1997 (Cth) s855-20.

[4] Explanatory Memorandum, Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 51 [2.56]

[5] Ibid, 54 [2.72].


GET IN TOUCH:

Adrian Wyper

Tax Paralegal

adrian@petergell.com.au

 

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