Foreign resident capital gains tax withholding payments
08 August 2016
What is Foreign Resident Capital Gains Withholding?
Foreign resident capital gains withholding is a 10% non-final withholding tax which is applied on payments made to foreign residents that dispose of certain taxable Australian property. This withholding applies to contracts entered into on or after 1 July 2016. The penalty for failing to withhold is equal to the amount required to be withheld and paid. An administrative penalty may also apply and interest charges apply to late payments.
While there is no change to the underlying capital gains tax liability, a new compliance burden has been created for the purchasers of real estate from foreign residents because they are required to withhold 10% of the purchase price and remit it to the Australian Taxation Office (‘ATO’) without delay unless a clearance certificate or variation notice has been received (see below).
The foreign resident vendor may then either have a further income tax liability or may be entitled to a tax refund depending on the value of the final capital gain. This will be determined when the foreign resident’s annual income tax return is submitted to the ATO.
While this change is primarily aimed at capturing capital gains made by foreign residents, it also applies where the disposal of such ‘taxable Australian property’ by a foreign resident generates gains on revenue account. For example, it applies where taxable Australian property is disposed of as part of a property development business.
What property is included?
The new foreign resident capital gains withholding is aimed at ‘taxable Australian property’, namely:
- Real estate located in Australia, including land, buildings, residential and commercial property.
- Lease premiums paid in relation to the grant of a lease over real estate in Australia.
- Mining, quarrying or prospecting rights.
- Indirect interests in real estate such as shares in Australian companies whose majority assets consist of real estate.
- Options or rights to acquire the above properties or interest.
What property is excluded?
There are three main exclusions from the new withholding rules. Where the foreign resident meets the requirements for one any of the following three categories the withholding is not applicable.
- Real estate with a market value under AU$2 million.
Note that the purchase price is accepted as a proxy for market value when a sale takes place between a purchaser and vendor on an arm’s length basis.
- Transactions that are listed on an approved stock exchange.
- Sales where the foreign resident vendor is under external administration or in bankruptcy.
How will this be administered?
The ATO has made available the following three forms to assist taxpayers in meeting their compliance obligations.
Clearance certificate application form – for Australian residents
This form is to be completed by foreign residents who are tax residents of Australia. If approved by the ATO then the resulting clearance certificate removes the need for the purchaser of the asset to withhold any amount from the purchase price.
The foreign resident vendor must provide the purchaser with an ATO issued clearance certificate on or before the day of settlement of the sale of the asset in order to ensure that no withholding is required from the sale proceeds.
Variation application form
Foreign resident vendors who do not secure an exempting clearance certificate can nevertheless apply for a reduction to the 10% rate of foreign resident capital gains withholding.
The foreign resident vendor has to provide the purchaser with an ATO issued variation notice on or before the day of settlement of the sale of the asset to ensure that the reduced rate of withholding applies.
Purchaser payment notification form
The purchaser uses this form to notify the ATO of a transaction that will take place, or has taken place, in which foreign resident capital gains withholding applies. This form needs to be completed and lodged with the ATO on or before the day of settlement of the purchase of the asset.