The Tax and Superannuation Laws Amendment (2015 Measures No 6) Bill 2015 recently received Royal Assent, becoming Act No 10 of 2016.
The amendments contained in the Bill impose a 10% withholding obligation on the purchasers of the following assets acquired from certain foreign residents:
- Taxable Australian Real Property (‘TARP’);
- Indirect Australian real property interests (‘indirect ARPI’); or
- An option or right to acquire TARP or an indirect ARPI.
The amendments will apply to applicable assets acquired, for CGT purposes (i.e., generally when a contract to purchase is entered into), on or after 1 July 2016.
Taxable Australian Property includes (but is not limited to) a direct or indirect interest, or an option to buy an interest, in real property in Australia (including a lease of land). (An indirect interest arises where someone ‘owns’ 10% of an entity, which itself ‘owns’ underlying Australian real property valued at more than 50% of its total assets).
The new law contains provisions requiring the purchaser to be shown a ‘clearance certificate’ for all TARP sold for $2 million or more to avoid withholding. That is, if the sale of TARP (or a company title interest) is $2 million or more, a withholding obligation will arise for the purchaser, unless the vendor has obtained a clearance certificate from the ATO and provided it to the purchaser prior to settlement.
This obligation arises regardless of whether any of the vendors are foreign residents or not.
The following example may assist in understating the new law:
- On 1 August 2016, John enters into a contract to purchase a residential property (i.e., TARP) for $3 million. John does not know whether the vendor is a foreign resident. Settlement is proposed to occur on 1 October 2016.
- Despite requests from John’s lawyer (both before and after the contract was signed) the vendor refuses to obtain a clearance certificate from the ATO to give to John, and will not do so by the time settlement occurs.
- As the CGT asset is TARP (with a market value of $3 million), in the absence of a clearance certificate, John will be required to withhold and pay to the ATO $300,000 when, or before, he becomes the owner of the property, whether or not the vendor is an Australian resident.