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15 July 2016

Beware: The new 10% CGT withholding tax

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On 1 July 2016, the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 came into effect.

The Act is intended to assist the Australian Taxation Office (ATO) in the collection of foreign investors’ Australian tax liabilities arising from the sale of real property with a market value of two million dollars ($2,000,000) or more being:-

  • land, buildings, residential properties and commercial properties;
  • lease premiums paid for the grant of a lease over real property in Australia;
  • mining, quarrying or prospecting rights;
  • interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest;
  • options or rights to acquire the above property or interest.

The tax regime in the family law context:-

  • applies, not only to foreigners, but to Australian residents selling real property with a market value of $2,000,000 or more;
  • applies even when real property is transferred from one former spouse to the other.  For example, a former spouse may move to live overseas and matters have not been resolved or the former spouse living overseas has agreed to transfer their interest in the family home to the party living in Australia. Who is to pay the tax? Where are the funds to come from?
  • applies to real property held in a trust;
  • applies to real property interest held in various family trusts which are in partnership with each other;
  • could result in a delay in completion of a matrimonial or de facto property matter due to the regime.

NOTE:  The $2,000,000 threshold is the value of the real property as a whole, not a party’s interest in that property. 

For example, A and B own a residential property valued at $2,000,000 as tenants-in-common in equal shares, meaning their interests in that property are $1,000,000 each.  Even though A is transferring his $1,000,000 interest to B, the transaction is caught by this regime as the market value of the real property is $2,000,000.

 

Clearance Certificate for Australian tax resident

To avoid the withholding tax obligation, Australian tax residents will need to obtain a clearance certificate issued by the ATO. The clearance certificate is valid for 12 months.

In order to obtain a clearance certificate, an Application needs to be lodged with the ATO.  The ATO will assess the Application and if satisfied the seller (or transferor if one spouse is to retain the real property) to the real property transaction is an Australian tax resident, the clearance certificate will be issued.

If a party does not obtain a clearance certificate, the purchaser (or party acquiring the property) will be required to withhold 10% of the purchase price and pay it to the ATO, until the seller lodges their tax return.

NOTE:  An independent valuation will need to be obtained to ascertain the value of the real property for withholding tax purposes.  It is not sufficient to rely on the parties’ estimated value of the real property.

 

Non-residents – variation of the 10% withholding tax

The regime allows a seller to apply to the ATO have the 10% withholding tax reduced.

 

Penalties

 The ATO can impose:

  • interest charges for delay; and
  • administrative penalties.

 

Where to from here

It is important to obtain expert accounting advice as to taxation matters and legal advice about the terms of the property settlement prior to entering into an agreement.

If you would like to obtain advice about your property settlement negotiations, please make an appointment with one of our solicitors.

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