Australia introduces new foreign- resident capital gains tax withholding regime

Tax Insights
from International Tax Services
Australia introduces new foreignresident capital gains tax
withholding regime
March 14, 2016
In brief
Australia on February 25, 2016, enacted the Tax and Superannuation Laws Amendment (2015
Measures No. 6) Bill of 2015 (the Bill). After passing both Houses of Parliament, the Bill received royal
assent on February 25, 2016. The Bill enacts a new 10% non-final withholding tax on the disposal of
certain taxable Australian property by foreign residents.
The new regime will apply to transfers of direct and indirect interests in taxable Australian property on or
after July 1, 2016.
Foreign residents that currently hold interests in taxable Australian property, or that are contemplating
acquiring such assets from other foreign residents, should be aware of the potential impact of the new
rules.
In detail
Background
Foreign residents generally are
subject to Australian income tax
on capital gains arising from
transfers of taxable Australian
real property (TARP) or from
transfers of an ‘indirect
Australian real property
interest,’ which broadly
constitutes a 10%-or-more
ownership interest in an entity
for which more than 50% of the
market value of the entity’s
assets are attributable to TARP,
including leasehold interests
and items fixed to land. These
circumstances usually require
an assessment of the nature of
assets held by the relevant
entities.
The new foreign-resident capital
gains tax (CGT) withholding
regime is designed to ensure
that capital gains of foreign
residents do not escape
Australian taxation. The new
regime includes a collection
mechanism that imposes a
withholding tax obligation on
the purchaser of certain
property from a foreign-resident
vendor.
New foreign-resident CGT
withholding regime
The new regime imposes a 10%
non-final withholding obligation
on purchasers of certain
Australian assets, if the assets
are acquired from a foreign
resident.
The key features of the new
regime are set out below.
When is the application date?
The new measure applies to
acquisitions occurring on or
after July 1, 2016. The
acquisition date generally is
considered to be the date on
which a contract is entered into.
Therefore, in most cases, the
legislation will apply to
contracts entered into on or
after July 1, 2016.
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Who has the withholding obligation?
The withholding obligation is imposed
on the purchaser of certain taxable
Australian real property (see below),
which could be an Australian-resident
or foreign-resident purchaser.
When does the obligation arise?
The withholding obligation arises if:
 an entity, such as the purchaser,
acquires a CGT asset from one or
more other entities (the vendor);
 at least one of the vendors is:
–
known to be a foreign resident
–
reasonably believed to be a
foreign resident or
–
not reasonably believed to be
an Australian resident, and
either has an address outside
Australia or the purchaser is
authorized to provide a
financial benefit relating to
the transaction to a
jurisdiction outside Australia;
and
 the CGT asset is:
–
TARP
–
an indirect Australian real
property interest or
–
an option or right to acquire
such property or such an
interest.
This obligation will apply unless the
transaction is specifically excluded.
Specific exclusions include:
 transactions involving TARP or
‘company title interests’ if the
market value of the CGT asset is
less than A$2 million
 transactions on an approved stock
exchange or
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 transactions involving vendors that
are subject to formal insolvency or
bankruptcy proceedings.
A ‘company title interest’ generally
constitutes a right to occupy land or a
building erected on that land that
arises due to ownership of shares or a
contract to purchase shares in a
company that owns such land or
building.
If a transaction relates to TARP, or an
indirect Australian real property
interest that gives rise to a company
title interest, a vendor is treated as a
foreign resident for these purposes
unless that entity provides the
purchaser with a clearance certificate
obtained from the Commissioner of
Taxation. The vendor must apply
electronically for a clearance
certificate, which will be valid for 12
months. Even if the purchaser knows
the vendor is an Australian resident,
the vendor must provide a clearance
certificate to the purchaser to remove
the obligation to withhold.
For CGT assets other than TARP and
indirect Australian real property
interests that give rise to a company
title interest, a vendor may provide
the purchaser with a residency or
interests declaration. Such a
declaration indicates that the vendor
is an Australian resident or that the
CGT assets are not indirect Australian
real property interests. If a vendor
provides such a declaration, the
purchaser is not required to withhold
from the proceeds.
How much should the purchaser
withhold?
Unless a variation is approved (see
below), the purchaser must withhold
10% of the first element of the cost
base (usually the purchase price) to
pay to the Commissioner. The amount
may be withheld from the payment
the purchaser makes to the vendor.
If the transaction involves certain
types of earnouts (for example,
additional payments based on future
performance), 10% of the market
value of such financial benefit may be
subject to withholding.
However, the purchaser or vendor
may request the Commissioner to vary
the withholding amount in certain
circumstances. A variation may be
appropriate if the foreign resident will
not generate a capital gain as a result
of the transaction; for example, it will
generate a capital loss or be eligible
for roll-over relief. A variation also
may be possible if the foreign resident
otherwise would not have an income
tax liability because of, for example,
carried forward capital losses or tax
losses.
The vendor will be entitled to a credit
for the amount paid to the
Commissioner. The vendor must file
an income tax return to claim the
credit.
When should the taxpayer pay an
amount to the Commissioner?
Amounts withheld under these
provisions must be paid on or before
the day the purchaser becomes the
owner of the CGT asset. That date
generally will be the transaction’s
completion (settlement) date.
The purchaser may incur significant
penalties if it fails to withhold. Late
payments may be subject to general
interest charges.
Observations
Knowledge of the vendor / asset
Beginning July 1, 2016, the new
withholding rules may impose
additional obligations on purchasers
to ensure that they are withholding as
and when required related to certain
acquisitions of TARP, indirect
Australian real property interests, or
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options or rights to acquire such
interest.
The new withholding tax regime is
based on the assumption that the
purchaser has a basic knowledge level
of the residency status of the vendor
and the relevant CGT asset.
Historically, there could be many
cases in which such knowledge did not
exist. In the future, purchasers may
need to perform additional due
diligence related to the vendor’s
identity and the nature of the assets.
For purchase of membership interests
in companies or units in trusts that
may be indirect Australian real
property interests, contract
negotiations may result in the vendor
having to make certain declarations
regarding its residency or the nature
of the asset, i.e., whether it is an
indirect Australian real property
interest. In most cases, a purchaser
will be able to rely on these
declarations, unless they are known to
be false. This information will be
critical, considering the penalties for
failure to withhold could be
significant.
At the time of a transaction involving
membership interests in a company or
trust, the vendor may not be certain
whether the interests are indirect
Australian real property interests.
This uncertainty could be due to
complexity or delays in undertaking
specific asset valuations for the
purposes of applying the relevant
Australian tax provisions. In such
cases, the vendor may need to
evaluate the consequences of
withholding against incorrectly
declaring that the asset is not an
indirect Australian real property
interest.
Obligations of the purchaser
The withholding obligation applies to
any purchaser, whether it is an
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Australian or foreign resident. This
requirement means that some foreign
residents not currently identified
within the Australian tax system may
be required to withhold and remit
amounts to the Commissioner, which
will require them to register to
withhold. Thus, some entities may be
brought within the Australian tax net
as a result of purchasing certain real
property interests from a foreign
vendor, even if the purchaser itself
would not be subject to Australian tax
on a subsequent asset sale.
Taxpayers should consider the new
withholding obligation for any
transactions that include a non-cash
component, such as payment by way
of a note payable or stock rather than
cash. The purchaser may be required
to fund the withholding tax obligation
from other cash sources if the cash
component of the purchase price
consideration is less than 10% of the
purchase price. A similar issue may
arise if the transaction involves a
deferred settlement. The requirement
to remit 10% of the purchase price to
the Commissioner will remain,
regardless of whether the purchase
price is due under the contract.
Issues for the vendor
A vendor may want to request a
variation to the withholding amount
in certain cases, such as when the
vendor will not generate a capital gain
from the sale, the vendor can apply
CGT rollover relief related to a
corporate reorganization, or when
withholding at the rate of 10% of
proceeds exceeds the actual Australian
tax payable on the resulting gain.
Timing of such a variation will be
critical. Unless the purchaser has
received the Commissioner’s approved
variation by the time the contract
settles, the purchaser will continue to
have an obligation to remit 10% of the
purchase price. The Commissioner
may take up to 28 days to issue a
variation.
Vendors should note that once they
have sought a variation from the
Commissioner, the Commissioner will
be aware of the transaction and the
vendor’s identity.
The takeaway
The new withholding regime will
likely affect both foreign purchasers
and vendors. Foreign residents
contemplating entering into
transactions —both third party and
related party — involving a transfer of
Australian real property or an indirect
Australian real property interests
should consider the impact and
obligations imposed by the new rules.
The new rules are likely to have a
material impact on merger and
acquisition (M&A) transactions as
well as intragroup restructures
involving Australian assets. In M&A
deals, purchasers may need to
perform additional due diligence to
confirm the vendor’s residency and
the nature of the assets, and may need
to seek declarations from the vendor
regarding its residency or the nature
of the interests being acquired. Share
purchase agreements should be
reviewed from an Australian tax
perspective to ensure that the new
withholding obligation is adequately
addressed, such as through the
addition of withholding tax gross-up
clauses if appropriate).
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Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services
Neil Fuller, Vancouver
+61 419 974 540
[email protected]
Jessica W Wong, New York
+1 (646) 471 7713
[email protected]
Cherie R Mulyono, New York
+1 (646) 471 9899
[email protected]
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