7 March, 2016
Tax legislation to introduce new withholding regime introduced
What you need to know
- The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015, introducing the new foreign resident capital gains tax (CGT) withholding regime was introduced into Parliament on 3 December 2015. The regime is intended to apply from 1 July 2016.
- A 10% non-final withholding tax will apply on the disposal by "foreign residents" (as defined) of relevant taxable Australian property where certain conditions are satisfied.
- The purpose of the regime is to assist the Commissioner in the collection of CGT payable by foreign residents.
What you need to do
- Consider the practical operation of the new regime and the impact it will have on future transactions.
- Consider, in particular, the requirement for an Australian Taxation Office (ATO) clearance certificate or a vendor declaration (as appropriate) and the impact of obtaining these on the timing and documentation of relevant transactions.
The Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 (Bill) was introduced to Parliament on 3 December 2015. It will implement a new foreign CGT withholding tax regime and is scheduled to apply from 1 July 2016.
Under the new regime, the purchaser of certain Australian assets from a relevant "foreign resident" is required to withhold and remit 10% of the total consideration to the Commissioner of Taxation (Commissioner).
The foreign resident will be entitled to a credit for the amount paid to the Commissioner. The vendor must lodge an income tax return to claim the credit.
Foreign residents are currently required to lodge an income tax return and pay tax in respect of any Australian assessable capital gain, noting that Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997) limits the assets upon which foreign residents are required to pay CGT. The withholding obligations in the new regime aim to address what are stated to be the current low levels of compliance with this obligation and will assist the Commissioner in the collection of foreign residents' CGT liabilities.
New regime under the Bill
The following conditions must be satisfied for the withholding tax regime to apply:
- the asset acquired must be a relevant asset (First Condition);
- the vendor of the property must be a relevant "foreign resident" (Second Condition); and
- the acquisition must not be an excluded transaction (Third Condition).
First Condition: Relevant Asset
The new regime applies to acquisitions of the following assets that are currently subject to Australian CGT on disposal by a non-resident owner:
- taxable Australian real property (TARP);
- an indirect Australian real property interest; or
- an option or right to acquire such property or interest.
TARP assets include real property situated in Australia (including a lease of land) and mining, quarrying or prospecting rights (if the minerals, petroleum or quarry materials are situated in Australia).
An indirect Australian real property interest is, broadly, a non-portfolio interest (ie 10% or more) in an entity whose assets comprise more than 50% Australian real property by market value.
Second Condition: Relevant "Foreign Resident"
The regime only applies if the vendor is a "foreign resident" (as defined).
Relevant foreign resident vendor
A "foreign resident" is generally a person or entity that is not an Australian resident for tax purposes.
Under the new regime, the entity is a relevant "foreign resident" if at the time a transaction is entered into:
(a) the purchaser is aware that the entity is a foreign resident;
(b) the purchaser reasonably believes that the entity is a foreign resident;
(c) the purchaser does not reasonably believe that an entity is an Australian resident and either
(i) the entity has an address outside Australia.
(ii) the purchaser is authorised to make payments outside Australia;
(d) the entity has a connection outside Australia, as specified in the regulations; or
(e) the CGT asset to which the transaction relates to is TARP or a company title interest (ie a company title arrangement where shares are held in a company that owns real property rather than a direct real property interest).
Paragraph (e) above appears to effectively apply the provisions to all sales involving Australian real property or a company title interest (not otherwise excluded) even where the seller is clearly an Australian resident. It seems that an ATO clearance certificate (refer below) would be required to ensure withholding does not apply to these transactions. This is a curious outcome likely to lead to a significant additional compliance burden.
Third Condition: Not an Excluded Transaction
A transaction that results in the acquisition of a CGT asset is excluded from the regime under the Bill if any of the following criteria are met:
- the TARP has a market value of less than $2 million;
- the value of company title interests is less than $2 million;
- the transaction is an "on-market" transaction conducted on an "approved stock exchange" (off-market transactions are not excluded);
- the transaction is conducted using a broker- operated crossing system (ie a "dark pool");
- the transaction is subject to another withholding obligation;
- the transaction is a securities lending arrangement; or
- the foreign resident is under external administration or bankruptcy.
Exceptions
Clearance certificates
For acquisitions of TARP or company title interests, the Commissioner may provide a clearance certificate which certifies that there is nothing to suggest that an entity is or will be a foreign resident for a specified period. If such a certificate is provided, the purchaser is entitled to rely on the certificate and no withholding is required. The certificate needs to be provided to the purchaser prior to settlement.
The application for a clearance certificate will result in an additional administrative burden and costs and may result in delays in the ability to settle the sale of relevant assets. As noted above, because of the way the second condition relating to foreign residency of the vendor has been drafted, making such an application will be essential for all TARP transactions over $2 million even if, as will often be the case, the Australian residency status of the vendor is non- controversial.
The ATO have announced that, if it has all the information required to assess whether the vendor should be treated as an Australian tax resident, the certificates should be provided within 1–14 days. Otherwise, some manual processing may be required and the certificates could take 14-28 days. Clearance certificates are expected to be valid for 12 months.
Declarations as to residency
For transactions relating to assets other than TARP and company title interests (eg indirect real property interests), purchasers can rely on a vendor declaration that confirms that the vendor is not a relevant foreign resident.
Such a declaration could be inserted into sale agreements as a standard clause contractual warranty. A purchaser that receives a declaration is entitled to rely on it, unless the purchaser knows it to be false.
If an asset is acquired from multiple vendors, a purchaser may seek a declaration from each vendor.
Declaration membership interest is not indirect Australian real property interest
A further declaration can be made in the case of CGT assets that constitute membership interests (eg shares in a "land-rich" company). In those circumstances the vendor can declare that the membership interest is not an indirect real property interest (eg because the
relevant entity does not hold sufficient interests in Australian real property). As with a declaration as to residency, a purchaser may rely on this declaration unless the purchaser knows it to be false.
A vendor may make a standing declaration as to either residency or the status of membership interests which remains valid for six months after the date of the declaration.
Timing of payment of the withholding tax
The 10% withholding tax must be paid to the Commissioner on or before the day of settlement. This also applies to transactions where the consideration is paid in instalments, as the obligation relates to the total purchase price for the asset acquired, rather than to a specific payment.
Variation of withholding amounts
Under the new regime, the Commissioner may vary the amount payable. The variation may include a variation to nil. A purchaser or vendor may apply for a variation.
The reasons a foreign resident or purchaser may apply to the Commissioner to vary an amount include:
- the foreign resident will not make a capital gain on the disposal of the asset (eg there are tax losses available to offset any gain);
- the foreign resident will otherwise not have an income tax liability; and
- there are multiple vendors, only one of which is a foreign resident.
Secured creditors
One issue that was raised in the consultation process for the new withholding rules is the potential impact on secured creditors (eg the proceeds from the sale of an asset subject to the withholding rules may be insufficient to cover both the amount payable to discharge the security held by a secured creditor and the amount payable to the Commissioner). The explanatory materials state "it is not the intention of these amendments to undermine the security of creditors in the event of a vendor's default".
What's next?
The progression of the Bill through Parliament should be monitored. Entities regularly involved in the sale or purchase of relevant assets should consider how they will deal with this change. For example, further consideration will need to be given to:
- the need to amend standard form documentation for real property transfers, for example to include residency declarations or the requirement to supply an ATO clearance certificate or other provisions relevant to the new withholding measures.
- Inserting additional steps into the conveyancing process to ensure that any requirement to provide an ATO clearance certificate is able to be met in a timely manner.
For further information, please contact:
Ian Kellock, Partner, Ashurst
ian.kellock@ashurst.com
