Asset Withholding Tax changes from 1 July 2017
On 22 June 2017, the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 received Royal Assent.
Contracts/acquisitions of affected assets from 1 July 2017 will both:
- increase the purchaser’s potential withholding rate to 12.5% (replacing the existing 10% rate); and
- result in every acquisition of Taxable Australian Real Property ("TARP" – see Note 1 below) valued at >$750,000 being subject to a 12.5% purchaser withholding tax (subject to an exception applying - see Note 2 below), regardless of whether:
all parties may be residents for income tax purposes; and
the property might be the main residence of one or both parties to the transaction.
The asset withholding tax was originally introduced on 1 July 2016 for the primary purpose of imposing a withholding tax on certain assets acquired from foreign resident vendors – importantly a vendor of TARP is deemed to be a foreign resident for withholding tax purposes unless an exception applies. While some assets other than real property/TARP can be subject to the asset withholding tax (see Note 3 below) the most important practical effect of the new legislation is the significant increase in the number of real property transactions which will be affected where the contract date occurs from 1 July 2017 onwards. This increase is caused by the significant reduction in the market value threshold at which real property (TARP) is excluded from the asset withholding tax to <$750,000 (previously <$2 Million in the 2016/17 year). For example, at the time of publication, the median house price throughout both Sydney and Melbourne, the inner-suburban house price in most other capital cities and the value of many other TARP assets located throughout Australia exceeds the new $750,000 threshold.
As illustrated below, where TARP of >$750,000 value is acquired from 1 July 2017 (i.e. contracts signed from that date) the purchaser (regardless of their residence status and regardless of the nature of the real property being acquired) will either:
- need to receive a valid and current ATO Clearance Certificate from the vendor on or before settlement (confirming that the vendor is a tax resident) in which case no withholding is required and settlement can proceed as normal (see B in the below diagram); or
- ensure that 12.5% of the purchase price is withheld and paid to the ATO no later than settlement date, with only the remaining amount to be paid to the vendor (see C in the below diagram).
Note that some other more specific exceptions or variations may reduce or remove the withholding effect shown at C depending on the particular circumstances involved (see Note 2 below).
In this document “TARP” refers to Taxable Australian Real Property as defined in s.855-20 ITAA 1997 (see Note 1 below).
Importantly, if no ATO Clearance Certificate is received from the vendor on or before settlement date (see B) then (unless another specific exception or variation applies – see Note 2):
- the purchaser must withhold 12.5% of their tax cost base (usually their purchase price) and pay this to the ATO at settlement. If a purchaser was unaware of these rules and did not withhold (without any exception/variation in place) the purchaser will remain liable to pay to the ATO a 12.5% withholding amount (a minimum $93,750 if the property cost $750,000) as well as penalty General Interest Charge (GIC) in addition to any amounts already paid to the vendor; and
- the vendor will suffer a cash flow problem from not providing an ATO Clearance Certificate by settlement and having 12.5% of their price withheld (even if they are a resident who would be eligible to receive the certificate and even if the TARP sold may be their main residence). Any tax credit or refund to the vendor from the amount withheld will not be realised until the vendor lodges and is assessed on their next tax return (potentially many months later).
NOTE 1 – “TARP” is broadly defined in s.855-20 ITAA 1997 as including:
- any “real property situated in Australia” (including leases of land situated in Australia); and
- “mining quarrying or prospecting rights (to the extent [it is not otherwise] real property)” if the minerals, petroleum etc. are situated in Australia.
Each asset meeting the above TARP definition (including main residences, vacant land, commercial buildings and leases and more) is impacted by these changes if valued at >$750,000 at the time of a post 1/7/17 contract/acquisition date.
NOTE 2 – In addition to the ATO Clearance Certificate explained above, various exceptions may remove the impact of the withholding tax (e.g. a property valued at <$750,000, any acquisition from a Liquidator or similar or an on-market listed security transaction). Alternatively, an ATO Variation may reduce the rate (possibly but not always to nil) in other cases (e.g. a foreign or temporary resident vendor with eligibility to claim a tax loss or the CGT main residence exemption or some transfers caused by death or relationship breakdown, subject to specific eligibility requirements being met).
NOTE 3 – The asset withholding tax will continue to apply to some assets other than TARP (e.g. some shares or units in a company or unit trust with most of its underlying value comprising TARP and options to buy either such shares or units or a TARP asset). Subject to any exceptions or variations which may apply, these assets will be impacted by the higher 12.5% rate of withholding applicable from 1 July 2017 but no market value exception threshold is relevant to these assets (i.e. the $750,000 threshold change only affects acquisitions of TARP).
NOTE 4 – The above withholding tax issues can apply to any type of purchaser or vendor entity ranging from individuals through to companies, trusts, partnerships and super funds (including those which are tax residents and/or buying or selling a property which might be held privately as a main residence).
Given the short (9 day) period between this measure receiving Royal Assent and its application to contracts signed/acquisitions made from 1 July 2017 it is most important to understand that:
- anyone who may be involved in a >$750,000 real property / TARP transaction with a contract date from 1 July 2017 (either as a professional adviser including lawyers and conveyancers or indeed as a purchaser or vendor) should understand the potentially significant implications of the new rules explained above and how to implement solutions such as ATO Clearance Certificates or various exceptions/variations such as those at Note 3 above on or before settlement date; and
- tax professionals are likely to have an increased role in applying for ATO Clearance Certificates and ATO Variations and/or assisting clients in making a withholding tax payment upon settlement (even if not directly involved in the TARP transaction); and
- particular care should be taken to manage post-1 July 2017 related party/family transactions regarding >$750,000 market value TARP, where particularly short settlement periods may apply. The above changes apply in an identical manner to related party/family or third-party transactions.
WANT MORE DETAILS?
In addition to details available at www.taxastute.com.au, Tax Astute clients receive more information and specific details, questions and answers underlying the brief snapshot summary above as a part of their:
- Tax Astute Training Session;
- Tax Astute Final Reference Notes; and
- Tax Astute Detailed Multimedia Recording.
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