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Foreign resident sellers and buyers of assets in Australia: beware withholding tax

Charlotte Moore 14 Aug 2016

Foreign residents are subject to capital gains tax in Australia on the sale of certain interests in Australian real property, being:

• direct holdings in land in Australia, including freehold, leasehold and mining rights
• indirect holdings of 10% or more in a company or unit trust with holdings in Australian real property whose value comprises more than 50% of the total value of all its asset holdings

Foreign resident withholding tax (FRWT) has been introduced to overcome difficulties that the Australian Taxation Office (ATO) may have in enforcing capital gains tax assessments against foreign residents.  For example, the ATO could have difficulty enforcing an assessment against a foreign resident if the interest sold is the only asset of the taxpayer held in Australia and the entire proceeds of sale are immediately repatriated overseas.

What transactions are affected?

A transaction for the sale or disposal of:

• Australian real property if the market value of the transaction is A$2 million or more;
• Membership interests of at least 10% in entities where 50% or more of entity asset value is comprised of Australian real property;
• the grant of a right or option to sell such property or membership interest.

However, FRWT does not apply if any of the following circumstances exist:

• the transaction relates to shares listed on a public stock exchange
• the arrangement is already subject to another Australian withholding tax obligation
• the transaction is a securities lending arrangement
• the vendor is subject to formal insolvency or bankruptcy proceedings
• the vendor provides a clearance certificate from the ATO confirming Australian residency; or
• in the case of share or unit sales only, the vendor provides a declaration confirming Australian residency or confirming that the interest is not taxable (eg the value of the interest sold does not derive the majority of its value from Australian real property)

Every vendor is assumed to be a foreign resident in transactions directly involving Australian real property unless the vendor obtains a clearance certificate from the ATO prior to completion of the sale that confirms it is Australian resident.  A residency declaration in such case is not sufficient to discharge the purchaser’s responsibility to withhold.

A residency declaration in respect of a share or unit sale may be relied upon by the purchaser unless the purchaser has reason to believe it is false.  The ability to make a declaration instead of obtaining a clearance certificate is also available to a grantor of a right or option to sell Australian real property.

Compliance and liability for tax

For a vendor:

1. FRWT is a non-final withholding tax.  The amount withheld will be credited against any capital gains tax liability of the vendor in respect of the sale but only if the vendor lodges an income tax return that includes the capital gain on the sale.  No refund is available if the FRWT amounts exceeds the tax liability and no income tax return is lodged
2. A foreign resident vendor may apply for a withholding tax variation to reduce the applicable withholding tax rate below 10%.  For example, the ATO may agree to lower the applicable rate if the vendor can demonstrate it would not have a liability to capital tax (eg, there is an exemption available such as rollover relief) or its capital gains tax liability would be less than 10% of the gross price.  A copy of the approved variation must be presented to the purchaser prior to completion in order for the purchaser to calculate the correct amount to withhold

Penalties apply for false declarations (up to A$21,600).

For the purchaser:

1. A purchaser is required to withhold and remit the FRWT amount on or before the day that the sale completes.  A failure to withhold exposes the purchaser to potential penalties under the usual withholding tax regime, which can include a penalty equal to the amount that should have been withheld
2. A purchaser that withholds part of the purchase price is deemed to have paid that amount to the vendor so as to ensure that vendor is legally required to complete the sale

Taxand's Take

Given that the point at which an amount is withheld usually will be the day of completion, we recommend that appropriate provisions are included in every contract that is potentially subject to FRWT to govern the expectations of what payments will be made in order to ensure that completion can occur as planned and without dispute.   Such provisions should contemplate a scenario in which a person wishes to provide a clearance certificate but that certificate is not promptly issued by the ATO.

Article tags

Australia | Real Estate Tax