The Federal Government recently announced changes to the Foreign Resident Capital Gains Withholding (“FRCGW”) rate and threshold. The changes will apply to all contracts entered into from 1 July 2017 and include:
A reduction in the threshold for the disposal of Australian real property to a contract price of $750,000 (the threshold for contracts pre 1 July 2017 remains at $2M); and
An increase in the withholding rate to 12.5% (previously 10%)
The reduction in the threshold will have a significant impact on the property market, so if you are transferring an interest in Australian real property (“property”) to another party, you may be affected by the changes.
We note that the disposal of property is not limited to sales under an agreement to sell/purchase property, the following transactions may also be caught:
- Transfers of property relating to a deceased estate;
- Transfers of property as a result of marriage or relationship breakdowns.
- Transfers of property by Income Tax Exempt bodies; and
- Transfers of property under a business restructure or tax consolidation;
Disposals of Property – Do I need a Clearance Certificate?
If you dispose of property you will automatically be deemed to be a Foreign Resident unless you obtain a Clearance Certificate from the ATO. If you do not obtain a Clearance Certificate prior to the transfer or settlement taking place, the ATO may require the “purchaser” or “transferee” to withhold 12.5% of the contract price and remit it to the ATO.
We note that there are certain circumstances where the FRCGW that would have been payable can be (or is automatically) varied to nil where a Clearance Certificate has not been obtained. This includes transfers of relevant assets relating to:
- Deceased estates;
- Marriage and relationship breakdowns
- Income Tax Exempt entities
Deceased Estates -
The sale or transfers of relevant assets following the death of an individual may be subject to Foreign Resident Capital Gains Withholding, however, if certain conditions are met, the amount of FRCGW payable may automatically be varied to nil.
In very general terms where a relevant asset of a deceased estate is transferred to one of the following parties, the FRCGW payable to the Commissioner will be nil.
- A deceased’s legal personal representative (“LPR”);
- Beneficiaries of a deceased estate; or
- Surviving joint tenants that acquire a deceased joint tenant’s interest in a relevant asset.
Note the automatic variation only applies to transfers of relevant assets where the above conditions are met.
Any other disposal or transfer of a relevant asset by the deceased’s LPR will create a withholding obligation.
Marriage or relationship breakdowns
Transfers of relevant assets in connection with a marriage or relationship breakdown may also be subject to Foreign Resident Capital Gains Withholding, however the amount of FRCGW payable to the ATO may be automatically varied to nil if certain conditions are met.
In general terms, if a relevant asset is transferred to a former spouse under a Family Court order, and the transfer satisfies the CGT rollover provisions in Subdivision 126-A of the Income Tax Assessment Act 1997 (“ITAA 1997”), the transferor will not be required to obtain a Clearance Certificate and the transfer will not be subject to FRCGW.
Caution should be taken as the automatic variation of FRCGW does not apply to all transfers made in respect of marriage or relationship breakdowns so parties to the transfer should consult with their taxation and legal advisors before finalising any transfers to ensure Clearance Certificates aren’t required.
If relevant marital assets are not transferred in accordance with a Family Court order and are not eligible for CGT rollover relief under Subdivision 126-A ITAA1997, a withholding obligation will arise unless the transferring parties obtain Clearance Certificates.\
Income Tax Exempt Entities
A purchaser or transferee will not be required to withhold FRCGW where the transferor is an income tax exempt entity and provides the purchaser evidence of a private binding ruling (“PBR”) or other approved document issued by the ATO confirming that the entities income tax exempt status. The PBR or approved documentation confirming the transferor’s income tax exempt status must be valid for the year in which the transaction occurred.
If the transferor does not provide the purchaser or transferee with the required documentation to support the income tax exempt status, a withholding obligation will arise unless the transferring party obtains a Clearance Certificate.
Consolidated group transactions
When a member of a consolidated group purchases a relevant asset from another member within the consolidated group. The purchaser or transferee is still required to comply with the withholding obligations.
A Clearance Certificate can be applied for and issued to either the head company or the member of the consolidated group which holds the title of the property.
Electing to use CGT rollover provisions in relation to the transfer of property (e.g. a Section 122A rollover from an individual to a company, small business restructures under Subdivision 328G etc) may result in a nil tax liability, however, this does not automatically exempt the transaction from the withholding obligations under the FRCGW provisions.
If in doubt, the transferor should apply for a Clearance Certificate prior to effecting the transfers to evidence the Foreign Resident Capital Gains Withholding provisions do not apply.
The Foreign Resident Capital Gains Withholding regime has very broad application and clients may find themselves with a withholding exposure in situations where they least expect it.
We strongly recommend that where clients are looking to (or are required to) transfer, purchase or sell relevant assets they seek advice from their RSM advisors before settlement takes place.