Every
so often a new tax rule, with quite significant implications and obligations,
especially to the racing and breeding industry, comes on the scene with
surprisingly little media attention or fanfare.
One such rule is in relation to the new withholding tax regime applying to the
purchase of expensive property (i.e. for at least $2 million ) from non-residents, these rules relating to property
sales contracted on or after 1 July 2016 .
As a result, entities (including individuals) purchasing "Taxable Australian Real
Property" ("TARP") from foreign resident
vendors will be potentially be subject to a new 10% withholding tax obligation . Although the new withholding
obligations is labelled as applying in respect of acquisitions from foreign
residents, the new obligations can
equally apply where property is acquired from Australian resident vendors.
When does the new withholding obligation
apply?
Basically, under the new rules, a
purchaser will be required to pay an amount to the ATO, where certain
conditions are met, the new rules most relevant to the racing and breeding industry
are:
The asset acquired is Australian real property (e.g. a farm, residential
property);
The property acquired has a market value (i.e. not necessarily a 'manipulated'
contract price) of equal to or greater than $2 million dollars ;
The vendor of the property (including non-individuals) is a relevant foreign resident ; and
Where the vendor cannot obtain a clearance
certificate (see below).
Tax Warning – Withholding may apply in
respect of a resident Vendor
Where an Australian resident vendor disposes of property (or a company title
interest) and does not have a clearance certificate from the ATO (to certify
that they are not a foreign
resident), a withholding obligation can still arise for the purchaser.
Where a purchaser has an obligation to make a 10% withholding tax payment to
the ATO under these rules:
The amount to be paid to the ATO is generally equal to 10% of the purchase
price;
The payment must be made to the ATO on or before the day the purchaser becomes
the property owner (i.e. which is the date of settlement); and
The obligation of the purchaser to make a payment to the ATO effectively
overrides any contractual commitment to pay the full settlement proceeds to the
vendor.
Exceptions
to the new withholding rules – obtaining a clearance certificate and
declarations
There are two exceptions that can apply to allow purchasers to avoid
withholding and remitting obligations with respect to the purchase of relevant
property.
Exception 1 – ATO clearance certificate
There is no 10% withholding obligation imposed on a purchaser for transactions
involving property where the vendor has provided the purchaser with an ATO clearance certificate issued by the
ATO.
A clearance certificate is issued in writing by the ATO to the vendor, who then
provide it to the purchaser, certifying that there is nothing to suggest the
vendor is or will be a foreign resident during a specified period. A vendor
must make an application for such a certificate via the ATO's online form
entitled: "Clearance certificate
application for Australian residents", which is now available on the ATO's
website. N.B. Based on the experience in our office, these certificates can
take anywhere between 1-6 weeks to issue.
Exception 2 – Declaration obligation
For property sales involving an IARPI (an
indirect Australian real property interest), which is an interest in
property that is held indirectly through one or more interposed entities (e.g.
a company or trust), the vendor will be a relevant foreign resident where the knowledge condition is satisfied,
unless, for example, a residency or
membership interest declaration is made by the vendor and given to the
purchaser.
Paying
and reporting withholding amounts to the ATO
Once a purchaser works through the above rules and identifies that they have a
withholding obligation, the following guidelines should be considered regarding
the purchaser's obligations under these new rules:
Re amount to be withheld, 10% of the
purchase price is withheld, less,
if the acquisition is the result of an option being exercised, any payment made
and/or the market value of any property given for the option.
Note – if the purchaser is registered for GST and GST is embedded in the
purchase price of the property, the purchase price is reduced by any input tax
credit entitlement of the purchaser.
Any amount withheld must be paid to the ATO on or before the date of
settlement.
Where a payment is withheld, a purchaser must complete the ATO's approved
online "Purchaser Payment Notification" form.
Once the above form has been completed, the purchaser will receive a payment
reference number, which can be used to pay the 10% withheld by way of
electronic transfer or via a cheque.
Where a withholding amount has been paid to the ATO, vendors will be entitled
to a credit for amounts remitted to the ATO when calculating the income tax
liability on the sale.
Penalties
that can apply to purchasers who fail to meet these new withholding obligations
There is a strict liability for purchasers to get these new rules right, otherwise they will be subject to existing
administrative penalties if they fail to make the required payment. In
addition, the General Interest Charge (GIC) will apply to any amounts not paid
to the ATO by the required date.
Example – 10% withholding required for
property purchase
Allen enters into a contract (dated 4 July 2016) to purchase a breeding
property in the Hunter Valley for $4 million. Allen has no information re the
tax residency of the vendor.
Settlement is due to occur on 21 October 2016. Despite requests from Allen's
lawyers, the vendor does not obtain a clearance certificate from the ATO.
Will
Allen be required to pay an amount in respect of the property purchase?
Yes. As the property has a market value of at least $2 million, without
a clearance certificate, Allen will be required to pay the ATO $400,000 (10% of $4 million) on or before the day he settles on the
property.
If Allen fails to make this payment to the ATO (regardless of having withheld
the amount or not), he will be liable to pay the full $400,000 as a penalty to the ATO, as well as GIC.
Will
the result be different if Allen is satisfied the vendor is an Australian
resident?
No. As the property acquired by Allen is relevant Australian property,
the withholding regime effectively treats the vendor as a foreign resident at
first instance. Therefore, a clearance certificate must be obtained from the
ATO by the vendor in this case, for Allen to avoid the new withholding
obligation.
Where a clearance certificate is not obtained by the vendor, Allen must withhold and pay to the ATO, 10% of the
property's purchase price (i.e. $400,000).
Please contact for me to clarify or expand on any of the matters raised in this
article.
PAUL CARRAZZO CPA
CARRAZZO CONSULTING CPAs
801
Glenferrie Road, Hawthorn, Vic, 3122
TEL:
(03) 9982 1000
FAX: (03) 9329 8355
MOB: 0417 549 347
E-mail: paul.carrazzo@carrazzo.com.au
Web Site: www.carrazzo.com.au