September 2016 Edition

In this edition:

Welcome

Tips and alerts for small business owners

Changes to $500,000 lifetime super cap confirmed but not yet legislated

Foreign resident property acquisitions withholding regime

New legislation passed on 1 July 2016 states that a 10% non-final withholding tax must be sent to the ATO if the seller of an asset is a foreign resident. The 10% non-final withholding tax applies to anyone purchasing real property worth $2 million or more. The amount that is to be withheld by the purchaser is 10% of the purchase price.

Included Assets
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
If the foreign resident vendor falls within one of these categories then the 10% withholding is not applicable:

• Real property transactions with a market value under $2 million. The vast majority of residential house sales will be unaffected by this measure;
• Transactions listed on an approved stock exchange;
• The foreign resident subject to formal administration or bankruptcy.

The ATO has released three forms to assist in the administration of this regime. These include:

1. 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 above, 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 a clearance certificate 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. This can 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.

• Online Clearance Certificate Application form - foreign resident capital gains withholding

2. 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.

The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.

3. 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.

• Online Purchaser Payment Notification form - Foreign resident capital gains withholding
• Purchaser payment notification form and instructions

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.

*Purchase price implies the first element of the cost base of the taxable Australian property.

 Please contact your Goodwin Chivas & Co team member for further information.