Foreign Resident Withholding Tax – Practical Effects
The general thrust of the new foreign resident withholding tax regime is to require a purchaser to withhold 10% of the purchase price on acquisitions from foreign vendors of real property (real estate), or shares in a company that holds real estate.
However, the rules apply to all transactions involving real property and shares in companies, even if between two residents, unless steps are taken to fit within an exclusion.
Key elements of the new regime
Direct interests
- The regime applies to all transactions involving taxable Australian real property (including a mining, quarrying or prospecting right) exceeding a market value of $2million just after the transaction, even if the vendor is a resident.
- Company title is also treated as a direct interest.
- The obligation is to withhold 10% of the 1st element of the cost base, usually the purchase price or the varied amount if the ATO provides a variation (even if the transaction would not be liable for CGT e.g. deceased estates, CGT rollover). Note: On 6 September 2016 an ATO Legislative Instrument was registered that varied the payment to nil for assets passing under a deceased estate. The instrument also applies to assets passing under a joint tenancy.
- The $2 million threshold is based on market value, not the purchase price. If only a partial interest is being sold, the $2 million threshold applies to the value of the whole property.
- For transactions with related party or at an undervalue, the obligation to withhold is based on market value rather than purchase price
- All vendors must obtain a Clearance Certificate for a period covering the time the transaction is entered into.
- Declaration by the vendor (see below) will not be sufficient.
Indirect interests
- Withholding is only required if you know or reasonably believe that any vendor is a foreign resident; the entity has an address outside Australia (according to any record about the transaction) or an amount or financial benefit is payable to a place outside Australia (and you do not reasonably believe that the entity is an Australian resident), the entity has a connection outside Australia of a kind specified in the regulations; or the interest is a company title interest.
- Clearance Certificate is not relevant.
- No monetary exclusion – applies to shares with a value greater than nil.
- Shares are only covered if they fall within the concept of indirect Australian real property interest, which does not cover all companies or trusts that own real estate. The company or trust must pass a non-portfolio interest test and a principal asset test.
- Also applies to options and rights to acquire TARP or indirect Australian real property interests (para 1.72 of EM).
- Excluded if listed on an approved stock exchange; or conducted using a crossing system.
- Withholding is not required if, before you pay the ATO, the entity gives you a declaration that the entity is an Australian resident or the shares are not an indirect Australian real property interest for a period covering the time the transaction is entered into, and you do not know the declaration to be false.
- The declaration is of no effect if given more than 6 months before the time payment would otherwise be due to the ATO.
- Penalties for declarations that are false or misleading in a material particular: 120 penalty units if you know it is false or misleading, 80 penalty units if you were reckless in making the declaration and 40 penalty units if you did not take reasonable care in making of the declaration.
Variations
- Variation if 10% exceeds tax on profit.
- Variations at discretion of ATO, but the Commissioner must have regard to the need to protect a creditor’s right to recover a debt.
- Applications for variations may be made by the vendor, the purchaser or creditors of the purchaser.
Other exclusions
- Applies to acquisitions on or after 1 July 2016; that is, only to contracts entered into after that date.
- An amount is already required to be withheld from a withholding payment relating to the transaction.
- Certain securities lending arrangements (s 26BC(3) (a)(ii) of the Income Tax Assessment Act 1936 (Cth))
- Insolvency: The vendor is a company subject to certain arrangements for insolvency and external administration (paragraph 161A(1)(a) of the Corporations Act 2001(Cth)).
- Bankruptcy: Transaction occurs in administration of a bankrupt estate or other bankruptcy arrangements.
- Circumstances that are, under a foreign law, the same or similar to those in any of the above subparagraphs.
A purchaser is discharged from any liability to pay to the vendor, a creditor or any other person, the amount it pays to the Commissioner under the regime.
A purchaser paying an amount to the Commissioner must apply to register as a withholder.
Practical implementation
Does the foreign resident withholding tax involve taxable Australian real property or interests in entities with taxable Australian real property?
Direct interests
- Includes Company title.
- Market value of the whole property exceeds $2 million (irrespective of purchase price, and includes transactions not liable for CGT).
- If the vendor is an Australian resident, they must obtain a Clearance Certificate.
- If any vendor is a foreign resident, they must obtain a variation if amount withheld will exceed tax liability or some vendors are Australian residents.
Indirect interests
- No monetary exclusion – applies to shares with a value greater than nil.
- If the vendor is an Australian resident, they must include a Declaration in the agreement for sale of shares, units or other equity interest.
- If any vendor is a foreign resident, consider exclusions. If the interest is not an indirect Australian real property interest, include declaration in agreement.
- If any vendor is a foreign resident, obtain a variation if amount withheld will exceed tax liability or some vendors are Australian residents.
- Additional declaration required if declaration given more than 6 months before the required time.
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