Important changes to foreign resident capital gains tax

Overview

On 25 February 2016 the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act (the Act) was enacted.

The introduction of this legislation aims to address the currently low tax compliance of foreign residents who dispose of real property.

The way in which it does this however, is by placing an obligation upon a purchaser to withhold 10% of sale proceeds from an applicable transaction and pay that to the Commissioner for Taxation.

It applies to all contracts or option agreements entered into on and after 1 July 2016.

The new regime

The obligation of a purchaser to withhold funds at settlement applies if they are acquiring any of the following from a foreign resident:

  • taxable Australian real property; or
  • an indirect Australian real property interest; or
  • an option or right to acquire such property or such an interest.

A ‘foreign resident’ within the Act is, among other things, held to be an entity that the purchaser:

  • knows is a foreign resident; or
  • reasonably believes to be a foreign resident; or
  • does not reasonably believe is an Australian resident, and either the entity has an address outside Australia or the purchaser is authorised to provide a related financial benefit to a place outside Australia (whether to the entity or to anyone else).

Importantly, there are some exceptions to this regime which include if the value of the asset being acquired is less than $2 million.

A vendor can also acquire a clearance certificate from the ATO which is evidence to the purchaser that they are not required to withhold any proceeds from a transaction.

Implications

The following contracts and option arrangements should include provisions to deal with the changes:

  • All contracts or option agreements entered into on and after 1 July 2016; and
  • All option agreements entered into prior to 1 July 2016 where the contract for sale may be entered into on and after 1 July 2016.

Purchasers need to ensure that the amount withheld is paid to the ATO by the settlement date.

The amount withheld must be paid to the ATO on or before settlement/completion. This will have implications on the settlement process for applicable transactions and will be an additional consideration for a purchaser liable to make the payment.

Purchasers should also be aware that they are required to withhold 10% of any amounts paid, subsequent to settlement, which would otherwise have been payable.

A purchaser must ensure that the correct amount is withheld at settlement (including any adjustments) to avoid penalties from the ATO or having to pursue the vendor after settlement for further funds.

If you are a party to an applicable transaction or you are not sure if the new regime applies to you, Page Seager can assist to ensure all obligations of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act are complied with.
Please contact either David Shelley dshelley@pageseager.com.au or
                                       Brett Garth bgarth@pageseager.com.au if you require further information about these requirements.

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