For contracts of sale of real estate worth $2M or more entered into from 1 July 2016 new property rules state that 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.
The Federal Government new property rules establishing a withholding tax is brought in by the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015. It amends schedule 2 of the Taxation Administration Act 1953 (Cwlth) (the schedule) and will impact on conveyancing, family, business and wills and estates.
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.
A purchaser of a relevant CGT asset, new property, 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.
- 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).
Assets which are caught
A CGT asset, real estate, 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.
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.
If you are a Vendor and the asset is likely to be sold in the vicinity of $2million or more undertake the following actions.
- Understand that if the asset is sold for $2million or more the purchaser is obliged to withhold 10 per cent of the purchase price at settlement and pay it to the ATO unless a clearance certificate is obtained.
- An application for a clearance certificate should be made as soon as possible. Leaving it too late may create unnecessary complications in the lead up to and at settlement.
- Check that the clearance certificate is in the name of the vendor as set out on the title.
- Attach a copy of the clearance certificate to the contract of sale.
- Insert an appropriate special condition in the contract dealing with the sale by a foreign resident.
If withholding tax is payable –
Consider as soon as possible if there are sufficient funds to discharge any mortgages or other encumbrances if 10 percent of the purchase price is withheld.
Note that the mortgagee may refuse to discharge the mortgage, and the settlement will be jeopardised; and
You as vendor or the mortgagee can apply for a variation of the amount that must be withheld. The ATO has indicated it will take 28 days to finalise a variation.
Make a copy of any cheque payable to the ATO produced at settlement.
Where the purchaser withholds money at settlement seek confirmation from the ATO that payment has been made by the purchaser and to inform you if they discover it has not been remitted.
If you are a purchaser and the purchase price is $2million or more undertake the following actions.
- Check the contract documents for a clearance certificate.
- If you do receive a clearance certificate read it carefully and check:
- the name on the certificate matches the name of the vendor
- the settlement date falls within the period covered by the certificate
- the authenticity of the certificate by using the verification procedure which the ATO is making available.
If you have not received a clearance certificate in the lead up to settlement:
- register the purchaser as a withholder
- include the amount payable to the ATO for 10 per cent in the list of payments to be drawn from the settlement funds. Details of this payment should be included on the statement of adjustments sent to the vendor’s practitioner.
The ATO is expecting an electronic payment but may allow alternative forms of payment. Where the ATO allows payment by cheque, take any cheque for the ATO to settlement so the vendor can take a copy. Promptly make electronic payment or send the cheque to the ATO after settlement.
The legislation provides that the purchaser must pay the required amount to the ATO on or before the day the purchaser becomes the owner of the property. See subparagraph 14-200(2). However in a Learner Guide published by the ATO the statement is made that:
“………the Commissioner will administratively allow a short period after settlement to receive payment before imposing general interest charges and initiating recovery action.”
ATO forms and information
According to the ATO three online forms will be made available at www.ato.gov.au/FRCGW before 30 June 2016. These are:
- Clearance certificate application for Australian residents.
- Variation application for foreign residents.
- Purchaser payment notification. This form is used to register the purchaser as a withholder.
As a footnote stamp duty in Victoria is going from 3% to 7% for foreign nationals purchasing property in Victoria