Foreign Resident Capital Gain Withholding Payments – What to know

The 1 July 2016 Regime

The Foreign Resident Capital Gain Withholding Payment Regime, which introduced the requirement for a foreign resident capital gains withholding certificate, was implemented by the Federal Government on 1 July 2016, which imposed an obligation on Vendors to obtain an Australian Taxation Office (ATO) ‘Clearance Certificate’ for transactions that attracted a market value of $2 million dollars or greater.

If the Vendor does not obtain the Clearance Certificate and provide a copy to the Buyer prior to Settlement, the Buyer is required to withhold 10% of the purchase price, paying this amount directly to the ATO on or before Settlement.

The 1 July 2017 Amendments

The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 received Royal Assent on 22 June 2017, and requires an ATO Clearance Certificate be obtained for transactions which attract a market value of $750,000 or more.

As well as this, Buyers will now be required to withhold 12.5% of the purchase price in circumstances where the Buyer has not been provided with a valid ATO Clearance Certificate on or before Settlement. The obligation imposed on the Buyer to pay the withheld amount (12.5% of the purchase price) to the ATO on or before Settlement will remain unchanged.

Does this affect you?

If your Contract was entered into, and subsequently dated prior to 1 July 2017, the 2017 amendments will not apply to your transaction. This means that if your Contract is dated prior to 1 July 2017, the Vendor is only required to obtain an ATO Clearance Certificate on transactions attracting a market value of $2 million dollars or more, and the Buyer is required only to withhold 10% of the purchase price if not provided with a valid ATO Clearance Certificate on or before Settlement.

If your Contract is dated from 1 July 2017 onwards, the transaction will be subject to the 2017 amendments and the provisions of the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 will apply.

Does this only impact Real Property Transactions?

While this summary is focused specifically to Real Property transactions, these amendments impact other areas including (but not limited to); Leases of land in Australia (attracting Lease Premiums for the grant of Lease), Mining, Quarrying or Prospecting rights and Indirect Real Property Interests (such as shares).

New Risks

The enactment of this new legislation provides additional risks for both Buyers and Sellers to be aware of when entering into Contracts.

The reduction from a $2 million dollar threshold to a $750,000 threshold will dramatically increase the number of transactions subject to this legislation.

The obligation placed upon Buyers to withhold 12.5% of the purchase price can be problematic, and could place unwitting Buyers in the position of having to account to the ATO for the amount they should have withheld from the purchase price, in the event that they have not complied with their obligations.

Vendors must ensure that they act promptly in obtaining a foreign resident capital gains withholding certificate provide to the Clearance Certificate to provide to the Buyer in time for Settlement, in order to avoid the Buyer retaining 12.5% of the purchase price and paying it on to the ATO in accordance with their obligations.

It is also important to understand the difference between Market Value v Purchase Price. While most purchase prices that are negotiated and agreed upon when parties deal at an ‘arm – length basis’ will be accepted as a proxy for market value, parties who are deemed to be ‘related parties’ must be careful to ensure that expert evidence is obtained to ascertain the appropriate market value.

Failure to do so could result in Buyers failing to withhold part of the purchase price as required, and the ATO determining that the money is due and payable with general interest as applicable.

Talk to us

If you are unsure about your obligations under this new legislation when buying or selling property, we strongly suggest that you make an appointment with us prior to signing your Contract.

Please call us on (07) 5441 1400 to book an appointment with Mark Bray or Jacob Corbett.

Author: Jacob Corbett

Note: This summary is provided for general information regarding the Foreign Resident Capital Gain Withholding Payment Regime Amendments, and should not be construed as Legal Advice. Should you require Legal Advice in Sunshine Coast in respect of any of the matters raised above, we strongly recommend that you seek legal advice as soon as possible.