As outlined in Client Alert No 35 Foreign resident capital gains withholding payments – Implications for Australian resident vendors, the government introduced a 10% non-final withholding tax regime to assist in the collection of CGT from foreign residents. Although this regime has been publicised as targeting foreign resident vendors, it impacts all vendors and purchasers of certain taxable Australian property (i.e. vacant land, buildings, residential and commercial property, leaseholds and strata title schemes). The new withholding regime will apply to contracts entered into on or after 1 July 2016 involving disposals of real property with a market value of $2 million or above.
The legislation introduces a clearance certificate model to provide certainty to purchasers regarding their withholding obligations.
Foreign resident capital gains withholding clearance certificate
The ATO has now issued the application form for use by Australian resident vendors to obtain a capital gains withholding clearance certificate:
The application form is used to notify the ATO that foreign resident capital gains withholding does not need to be withheld from the sale of the property because the vendors are Australian residents.
The clearance certificate needs to be provided to the purchaser on or before settlement to ensure no withholding occurs. Apart from detailed instructions to complete the form, the ATO has clarified that the entity with legal title to the asset must obtain the certificate. For example, if legal title is with a trustee on behalf of a trust or superannuation fund, the trustee should apply for the certificate. The ATO has also emphasised that conveyancers are not permitted to complete the form on behalf of vendors unless they are legal practitioners or tax agents, but may submit a completed form on the vendor’s behalf.
Foreign resident capital gains withholding rate variation
The ATO has also issued the following form for vendors to seek a variation to reduce the rate of foreign resident capital gains withholding on the sale of Australian property:
Reasons for variation include that the asset is a pre-CGT asset, a CGT roll-over applies, an exemption is claimed (eg main residence), or the liability is less than 10% of the proceeds and any non-monetary consideration. A variation notice issued by the ATO will have to be provided to the purchaser on or before the day of settlement to ensure the reduced rate of withholding applies. Where there are multiple vendors, each vendor must lodge their own application for variation.
Vendors will need to lodge an income tax return to obtain a credit/refund for any tax withheld. Any tax withheld will be creditable against any Australian tax liability the Vendor may have on the sale. This will require non-residents who have had tax withheld to lodge an income tax return, with any excess being refunded as appropriate.
If you have any queries in respect to this matter, please do not hesitate to contact your Blaze Acumen adviser.