Jul 3

1 July new CGT withholding payments for real property sales of $2M or more

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Key points

  • New requirements for contracts of sale of real estate worth $2M or more entered into from 1 July 2016.
  • All purchasers of such real estate must withhold 10 percent of the purchase price unless they are given a clearance certificate by the vendor.
  • Vendors of such property who are not foreign residents need to apply for a clearance certificate as soon as possible.
  • Real estate includes vacant land, residential and commercial property – no exceptions.

Introduction

New withholding requirements for purchasers of certain property in Australia will commence 1 July 2016.

  • While the aim of the legislation is to capture unpaid tax from foreign residents, any vendor selling taxable Australian real property worth $2million or more will be subject to the withholding tax unless they apply for and provide to the purchaser a clearance certificate by the time of settlement.
  • The legislation also applies to some indirect interests in Australian property including leases, mining and quarrying rights, and options to acquire interests in such property.

Background

The reasoning behind the legislation is to capture the tax payable on capital gains by foreign residents that has historically been difficult to recover after the funds from a sale of property go off shore.

Key obligations

A purchaser of a relevant CGT asset will be required to withhold 10 per cent or another amount specified, from the purchase price of the asset and remit that money to the ATO. Failure to do so will render the purchaser liable to penalties and interest.

Exceptions

  • The CGT asset is taxable Australian real property with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).
  • The CGT asset is an indirect Australian real property interest, the holding of which causes a company title interest to arise with a market value of less than $2million (subparagraph 14-215(1)(a) of the schedule).
  • The CGT asset is either taxable Australian real property or an indirect Australian real property interest, the holding of which causes a company title interest to arise, with a market value of $2million or more but the vendor provides the purchaser with a clearance certificate stating that no withholding tax is required (subparagraph 14-210(2) of the schedule).
  • The entity provides a declaration that the CGT asset is a membership interest but not an indirect Australian real property interest and the purchaser is unaware the declaration is false (subparagraphs 14-210(3) and 14-225(2) of the schedule).Provide the name of any planning overlay affecting the land. See section 32C(d)(iv).

More exceptions can be found in subparagraph 14-215(1) of the schedule.

Assets which are caught

A CGT asset for the purpose of withholding is defined in subparagraph 14-200(1)(c) of the schedule as:

  • Taxable Australian real property. The Australian Taxation Office (ATO) has given the following examples:
    • land, buildings, both residential and commercial property
    • leases over real property
    • mining, quarrying, prospecting rights.
  • An indirect Australian real property interest. This means any interest in an Australian entity whose majority assets consist of taxable Australian real property.
  • An option or right to acquire taxable and/or indirect Australian real property.

Market value

The ATO has said that in most cases the market value of an asset will be the purchase price negotiated between a purchaser and vendor, acting at arm’s length as part of a competitive bargaining process