Non-Resident Withholding Tax Regime

From 1 July 2016, disposal of certain Australian property by non-resident Vendors will be subject to a non-final 10% withholding tax. The purpose of this is to assist in the early collection of tax from foreign residents and encourage them to meet their tax obligations in Australia. The tax is required to be withheld by the Purchaser and remitted to the Australian Tax Office (ATO).
 
In general, non- residents are subject to Capital Gains Tax (CGT) on Taxable Australia Property (TAP). Similarly, the 10% withholding is limited to transactions dealing with TAP assets. The following assets are consider TAP:

Taxable Australian real property:
  • vacant land, buildings, residential and commercial property
  • mining, quarrying or prospecting rights where the material is situated in Australia
  • lease premiums paid for the grant of a lease over real property in Australia
Other assets:
  • indirect Australian real property interests in Australian entities whose majority of assets consist of the above asset types (e.g. shares in a “land rich” company)
  • Options or rights to acquire any of the above asset types.
In is important to note the following exclusions from these provisions:
  • Taxable Australian real property with a market value of less than $2 million.
  • an indirect Australian real property interest that provides a company title interest with a market value of less than $2 million
  • transactions conducted through an approved stock exchange or a crossing system
  • transactions subject to another withholding obligation
  • securities lending arrangements as these arrangements do not trigger a CGT liability for the Vendor and therefore no payment obligation is imposed
  • transactions where the Vendor is in external administration or transactions arising from the administration of a bankrupt estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law.
The 10% withholding should not affect the majority of the residential market due to the exclusion for real property valued at less than $2 million.
 
Knowledge conditionthe requirement for withholding applies where the Purchaser has a reason to believe the Vendor is a non-resident. If the Purchaser does not have a reason to believe the Vendor is a foreign resident, this condition ensures the obligation to pay the withholding tax does not apply. The Explanatory Memorandum (EM) to the Bill explains that whether or not there are reasonable grounds to believe that a Vendor is or is not an Australian resident will be considered on an objective basis. The question is whether a reasonable person in the position of the Purchaser would have thought that there were reasonable grounds to support the relevant belief.
 
Calculation of withholdingthe withholding is calculated on the market value of the property. Where two parties are acting at arm’s length, the market value will be the purchase price. Where related parties are not dealing at arm’s length, the Purchaser will need to seek a separate expert valuation. The important aspect to note is that the 10% is calculated as a reference to the first element of cost base for CGT purposes. The first element of cost base is equal to the purchase price to acquire the asset i.e. before any adjustments for settlement costs, disbursements etc.
 
Australian Vendors – Real Property - For Australian resident Vendors, it is possible to apply for a clearance certificate to the ATO. The application for this certificate can be found by clicking here.  If this certificate is not provided and the Purchaser believes you may be non-resident, the Purchaser is required to remit 10% of the purchase price to the ATO.
 
Australian Vendors – Other Assets - For other assets that are not real property, a Purchaser can rely on a declaration made by the Vendor stating that the Vendor is not a foreign resident or the interest being sold is not an indirect Australian real property interest. The ATO has not yet issued standard declarations but have confirmed this can be inserted into a sale agreements as a contractual warranty.
 
Purchasersthe liability for failure to withhold rests with the Purchaser. Therefore it is important to note that any penalty and interest charges applicable will be payable by the Purchaser and not the Seller. The withholding applies on a property by property basis (i.e. if your share of property is less than $2 million but the property is valued at more than $2 million, it may still be subject to withholding).
 
The amount payable to the ATO is on settlement date. As per the EM:
 
Ben is acquiring a residential property for $3 million. Ben knows that the Vendor of the property is a foreign resident and that the acquisition is subject to a withholding obligation. Ben enters into a contract for the purchase of the property on 1 August 2016 and pays a $150,000 deposit. The contract is settled on 1 October 2016 when Ben is required to pay the balance of $2.85 million to the Vendor and receives a transfer of title to the property.
 
Ben withholds $300,000 from the settlement amount (paying $2.55 million to the Vendor). Ben must pay the $300,000 to the Commissioner on the same day, 1 October 2016.
 
The Purchaser will be required to complete a Foreign Resident Capital Gains Withholding Purchaser Payment Notification form and will be required to disclose the details of the Vendor and the asset. Once the form is processed, a payment reference number will be issued and the payment can be made.
 
Foreign Vendors - This has been enacted to encourage foreign residents to lodge tax returns in Australia. The Vendor will be able to claim a refundable tax credit on lodgement of their tax return for the amount withheld. Vendors can apply for variations if they believe the 10% withholding is too high. Reasons for variation include:
  • the Vendor will not make a capital gain on the transaction (for example, because they will make a capital loss or a CGT roll-over applies)
  • the Vendor will not have an income tax liability (for example, because of carried-forward capital losses or tax losses)
  • a creditor of the Vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures
  • a creditor acquires legal title to the property (that is, becomes the Purchaser) as a result of an order for foreclosure and its security would be further diminished as a result of having to comply with the withholding obligation.
Earn out arrangements – Where there is an earn out arrangement in place, the value of the earn out is excluded at the time of calculating the 10% withholding at settlement. However, if any subsequent payments are made under the earn out arrangement, 10% of the payment is subject to withholding if the Vendor is still a foreign resident at the time of making the payment.

Practical implications of the withholding tax
  • The liability rests with the Purchaser. Therefore where you are dealing with agents and you see the seller’s address is abroad, it would be crucial to check whether they are foreign residents. The ATO would deem in these situations that you had knowledge of their residence abroad.
  • In cases of financing and deferred payments, it is important for Purchasers to collect 10% for the withholding on settlement to avoid any cash flow issues.
  • Where purchasing from multiple Vendors, there may be additional withholding requirements (i.e. to report the 10% withholding for each Vendor separately)
  • Where there are multiple Purchasers, the value of the property is taken into account and not the value attributable to each Purchaser in order to use the $2 million exclusion
  • When appropriate, the sale and purchase contract can include a Vendor’s declaration stating their residency to safeguard the Purchaser’s interests.
  • Non cash transactions may be caught where two parties may not be dealing at arm’s length.
  • Scrip for scrip transactions may be an issue where the Vendor is not eligible for CGT rollovers.
It is important to get the ATO administration started early on when dealing with foreign residents as the withholding tax is payable on settlement. Therefore the payment reference numbers have to be generated prior to the transaction settling in order to meet this requirement.

Enquiries: Davide Costanzo, Director, Tax & Business Advisory, dcostanzo@moorestephens.com.au, (08) 9225 5355