1 July 2017 marks changes to Foreign Resident CGT Withholding Tax Regime: Tax Law Update
The amendments to the Foreign Resident CGT Withholding Tax Regime are now in force. If you’re involved in transactions involving Australian land, you need to factor in these changes. This is also relevant to purchasers of shares in non-listed property rich companies and purchases of units in unlisted property trusts.
What is property?
Property is defined broadly to include all Australian real property. This includes both residential and commercial real property, leasehold interests and mining, quarrying and prospecting rights.
In July 2016, the Federal Government introduced the Foreign Resident Capital Gains Withholding Payment Regime, which imposes a 10% non-final withholding tax on payments made to foreign residents who dispose of certain taxable Australian property. The regime applies to vendors and purchasers of real estate with a market value of $2 million or above, as well as purchasers of real estate with a market value of $2 million or above as well as purchasers of indirect Australian real property company title interests (such as unit shares in a company).
Under the original regime, unless a vendor of Australian real estate with a market value of $2 million or above produces a clearance certificate or vendor declaration issued by the ATO, the purchaser is obliged to withhold 10% of the purchase price, and pay this amount to the ATO on or before settlement.
Importantly, the “property value exclusion” only applies to direct acquisitions in Australian land, and not to indirect acquisitions or the granting of options (but it can apply to the subsequent transfer of the subject land on exercise of an option). Consequently you can still have obligations under the FRWT Regime on:
- The indirect acquisition of an interest in a majority Australian landholding company or trust even where the underlying Australian landholdings are less than the “property value exclusion” threshold; or
- The granting of an option in respect of Australian land even if the subsequent acquisition on exercise of the option would fall within the “property value exclusion”.
The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 reduces the threshold from $2 million to $750, 000 from 1 July 2017. This increases the number of properties and interests subject to this withholding obligation. Furthermore, the CGT withholding rate will be increased from 10% to 12.5%.
Things to consider
Given the broad reach of the regime, all parties to transactions involving direct and indirect acquisitions in, and the granting of options in respect of, Australian land, including freehold/leasehold and mining, quarrying or prospecting rights, should seek advice from an experienced solicitor in taxation law on their obligations under the regime.