07 Oct The new withholding tax obligation that everyone involved with Property should know
Anybody involved with property transactions in Australia should be aware that certain transactions arising from contracts entered into on or after 1 July 2016 will be caught by amendments to Schedule 2 of the Taxation Administration Act 1953 (Cth).
The aim of the legislation is to capture unpaid tax from foreign residents, but the way the amendments have been framed, any vendor selling a relevant CGT asset, typically (but not restricted to) taxable Australian real property, worth $2million or more will be subject to the withholding tax unless they apply for and provide to the purchaser a clearance certificate by settlement.
Subject to exceptions, a purchaser of a relevant CGT asset will be required to withhold 10 per cent or another amount specified, from the purchase price of the asset and remit that money to the ATO. Failure to do so may render the purchaser liable to penalties and interest.
The points to remember are:
- Vendors disposing of certain CGT assets under contracts entered into from 1 July 2016 are subject to a 10% withholding tax at settlement.
- When selling relevant CGT assets, a vendor will need to obtain a clearance certificate from the ATO prior to settlement to ensure they do not incur the withholding tax.
- The legislation imposes the obligation on the Purchaser to withhold 10% of the first element of the cost base (the purchase price) and remit the amount withheld to the ATO.
- A CGT asset is not restricted to direct real property, and can include leases over real property, mining and similar rights, indirect Australian real property interests, and options to acquire taxable and/or indirect Australian real property.
- Applications for clearance certificates from the ATO ought be made sooner than later, to avoid delays, settlement complications and unwanted consequences – preferably at the time of preparing contract documents. This will involve collecting relevant information from vendors as quickly and accurately as possible.
- If preparing contract documents, ensure they include appropriate special conditions.
- Consider what might happen if withholding tax is payable:
- will there be sufficient funds to pay a mortgagee and effect settlement – if not what action must be taken and how long will it take?
- What action is required to account for moneys withheld?
- If acting for a purchaser make sure you have received a valid clearance certificate, failing which consider what you need to do to withhold tax at settlement and properly remit it to the ATO.
Whatever the involvement and whoever one is acting for, the consequences of getting it wrong are significant. This summary serves as a rough guide on what to look out for.