Foreign resident CGT withholding tax now law

Buyers of capital gains tax assets must now withhold 10% of the consideration paid to buy the property and pay it to the Australian Taxation Office (ATO) if the seller is, or is ‘reasonably believed’ to be, a foreign resident. This requirement is effective from 26/2/2016.

Which sales are affected?

Withholding tax applies to “Taxable Australian Property” with a market value of more than $2m including:

  • Sales of real property situated in Australia (including residential property); and
  • Sale of indirect interests, such as shares, where at least 50% if the value is attributable to real property or mining interests for resources located in Australia, except where the interests are officially listed on and sold through a stock exchange.

The sale of businesses that are Taxable Australian Property will also be affected, adding further tax complexity to earn out arrangements.

Transactions excluded from this include those:

  • conducted on an approved stock exchange
  • as part of the administration of insolvency and bankruptcy matters

Discretion to vary the amount withheld

The Commissioner issue  may exercise discretion to reduce the amount which must be withheld, such as where secured creditors are entitled to more than 90% of the proceeds. The discretion must be applied for and is not guaranteed. Secured creditors also have the right to request exercise of the Commissioner’s discretion.

The withholding tax would be a non-final tax, which would be refundable on the lodgement of a tax return by the seller for the transaction should it exceed the tax liability.

Who is impacted?

Buyers must withhold the tax where they have not received a declaration of residence from the vendor and do not have reasonable knowledge of the vendor’s Australian residency. Failure to withhold can result in the buyer becoming liable for the amount personally.

Sellers who are Australian residents should provide a declaration of their residency or obtain a clearance certificate from the ATO to facilitate a smooth settlement without withholding tax. Non-residents can expect the amount to be withheld and must lodge an Australian income tax for final assessment of the tax owed, with the balance either payable or refundable. The time lag between the settlement and when you can lodge a tax return may adversely affect cash flow.

Secured creditors can apply to the ATO (as can vendors and purchasers) for a variation to the withholding tax so that their interest can be recovered on sale of the asset.

Unsecured creditors may have no right of recovery. Anyone with a right should register their interest on the Personal Property Security Register.

What to do now

For more information on whether you need to withhold tax on a purchase, if you need assistance with your tax residency status, or to find what you need to do to comply with the rules and eligibility for exemptions and discretions, please contact us for assistance.

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