New Capital Gains Tax (CGT) withholding regime from 1 July 2016

From 1 July 2016, purchasers who enter into a Contract for the sale of an interest in Australian land (including a lease of Australian land or any rights in relation to resources situated in Australia (e.g. mining right)) with a market value of $2 million or more will be required to withhold and pay 10% of the purchase price to the Australian Taxation Office (ATO) on account of the seller’s potential CGT liability unless the seller obtains a clearance certificate from the ATO and provides it to the purchaser on or before settlement.

New CGT Withholding Regime

The effect of this new regime is that where foreign residents who dispose of Australian real property with a market value of $2 million or above, the purchaser will be required to withhold 10% of the purchase price (not including adjustments) and pay it to the ATO, without delay. Australian resident sellers will need to provide a clearance certificate otherwise a withholding of 10% of the purchase price will also apply.

Whilst the regime has been implemented to target foreign investors it will have an impact on all sellers and purchasers of Australian land. It is important that purchasers are aware of their obligation to withhold a CGT amount from a seller at settlement.

Exclusions

The purchaser’s obligation to withhold a CGT amount from a seller at settlement will not apply if one of the following exclusions apply:-

1. The market value of the property is less than $2 million;
2. The seller has obtained a clearance certificate on or before settlement;
3. The transaction is listed on an approved stock exchange;
4. The foreign resident seller is under external administration or in bankruptcy.

Clearance Certificates

Sellers will need to apply to the ATO for a clearance certificate. The ATO will issue the clearance certificate if they are satisfied that the seller was or is not a foreign resident. It is expected that the clearance certificates will be issued within days of the application being submitted.

There will be a number of forms available online in respect of this new regime. The clearance certificate application will be available online from 27 June 2016.

Once issued, the clearance certificate will remain valid for twelve months. Therefore, the seller can apply for the clearance certificate even before a Contract of Sale has been signed.

Withheld Payments and Variations

If an amount is required to be withheld, the purchase must pay that amount to the ATO without delay as penalties will apply. The purchaser is also required to complete an online ‘Purchaser Payment Notification’ form to provide details of the transaction.

If the seller is not entitled to a clearance certificate but believes that a lesser percentage should be used in calculating the CGT amount, the seller can apply for a variation by submitting an online ‘Variation application for foreign residents and other parties’ form.

Again, these forms will not be available until after 27 June 2016.

It is important that purchasers ensure that this regime is complied with as significant penalties will apply if they fail to do so.

If you have any queries regarding the new regime and the impact that it may have on you please contact us.