Australia: Capital gains tax withholding

Eddie Ahn

On February 25 2016, the draft legislation introducing a new foreign resident capital gains tax (CGT) withholding regime received Royal Assent after being passed by the Australian Parliament. These rules take effect from July 1 2016 and impose a withholding tax obligation on purchasers of certain Australian real estate related assets.

Under the new CGT withholding tax regime, purchasers of relevant assets will be required to withhold 10% of the purchase price where at least one of the vendors is a foreign resident. The obligation applies to transactions involving assets that are direct interests in Australian real property, certain indirect Australian real property interests (being shares or other interests in entities that own Australian real property) and options or rights to acquire such assets.

The amount withheld is required to be remitted to the Australian Taxation Office (ATO) on or before the date the purchaser becomes the owner of the property (that is, by the completion date of the transaction).

Broadly speaking, a purchaser will not be required to withhold:

• for transactions involving a direct interest in Australian real property: where the vendor provides a clearance certificate issued by the ATO that verifies that the vendor is an Australian resident for the purposes of the CGT withholding provisions.

• for transactions involving an indirect interest in Australian real property: where the vendor provides a written declaration that confirms the vendor is an Australian resident or that the asset does not constitute an indirect Australian real property interest for Australian CGT purposes.

In addition, certain exemptions apply such as for low value assets (less than A$2 million), transactions conducted on the Australian Stock Exchange (or other approved stock exchange) and transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings.

Where withholding applies, in certain circumstances, the vendor, purchaser or a creditor can apply to the ATO to reduce the amount of withholding from the usual 10% rate. The rate can potentially be varied to nil. Examples of circumstances where such applications can be made include where: the vendor will not derive a capital gain from the sale, there are multiple vendors some of which are Australian residents or if the withholding tax would materially prejudice the creditor's ability to recover its debt.

The CGT withholding tax is not a final tax – the vendor may claim a credit for the tax withheld when filing its tax return for the relevant year. It may claim a refund of tax to the extent the amount withheld exceeds its final tax liability for that year.

If a purchaser fails to withhold when required, penalties can be levied up to the amount of the withholding required. Penalties can also apply to vendors where they may

On February 22 2016, the Australian Federal Government announced that it would incorporate a number of tax compliance obligations as conditions of its approval to applications by foreign interests in relation to investment in Australian businesses or real estate in respect of Foreign Investment Review Board (FIRB) approvals. The conditions include complying with Australian taxation laws, providing information to the ATO when requested, paying any outstanding taxation debts and notifying the ATO if it enters into any material transaction which could contravene Australian transfer pricing or general anti-avoidance rules.

Failure to comply with these additional conditions may potentially have serious consequences as a breach of the conditions will entitle the Government to impose the penalties, fines and other remedies available to it under the Foreign Acquisitions & Takeovers Act for breaches of FIRB conditions. One of these remedies includes divestment of the relevant property.

Indirect tax reform is also on the Australian Government's agenda. Presently, Australian goods and services tax (GST) and customs duty does not apply to goods that are imported via parcel post and which have a value of less than A$1,000. The Government has announced that this threshold will be abolished, at least for GST purposes, with effect from July 1 2017. GST will then apply to all imports, regardless of value. Draft legislation has not yet been released, but is expected in coming weeks.

The Government has also introduced into Parliament legislation relating to the China-Australia Free Trade Agreement. If enacted, the measures will allows goods originating from China to be imported into Australia at preferential duty rates.

• The draft legislation for the proposed changes to the concessional Managed Investment Trust (MIT) regime, including the implementation of the new attribution MIT rules, is now before the Senate of the Australian Parliament.

• The Prime Minister of Australia has announced that the Australian Federal Budget will be handed down on May 3 2016, one week earlier than usually scheduled. It is expected that several tax reforms will be announced in the Budget, noting that a Federal election will be held later this year although the election date has not yet been formally announced.

Eddie Ahn (eddie.ahn@dlapiper.com)

DLA Piper

Tel: +61 2 9286 8268 Fax: +61 2 9286 8007