From 1 July 2016, a new 10% withholding tax will apply to acquisitions of Taxable Australian Real Property (TARP) or Indirect Australian Real Property (IARP) interests. The withholding is based on 10% of the purchaser’s CGT cost base for TARP or IARP and must be paid to the Australian Taxation Office (ATO) on or before the settlement date.
The ramifications for a purchaser in failing to withhold are severe so they will need to be thorough in their due diligence, be clear about their withholding obligations, negotiate withholding and settlement terms with the vendor and seek adequate protections in contractual agreements. The measures could have flow-on effects for related GST and stamp duty liabilities if there are tax gross-up clauses in the purchase agreement. A prudent course for a purchaser of TARP or IARP is to assume a withholding applies unless the vendor can prove otherwise.
Taxable Australian Real Property is:
- Real property (including a lease) within Australia. The definition does not carve out residential property; or
- A mining, quarrying or prospecting right within Australia.
An Indirect Australian Real Property interest is a non-portfolio interest (greater than 10%) in an entity, or holding entity of another entity, whose value is predominantly represented by TARP.
The withholding can apply to:
- A purchase of TARP or a Company Title Interest from Australian or non-Australian residents; or
- A purchase of IARP from a person:
- the purchaser knows or reasonably believes is a foreign resident;
- with a foreign address; or
- that requests the purchaser to provide a financial benefit outside Australia.
Importantly, there are a number of exclusions from these measures being:
- The market value of the CGT asset is less than $2 million. The value of each similar interest in TARP held by a joint-owner is aggregated in assessing the $2 million market value.
- The transaction is on an approved stock exchange
- The transaction is conducted using a crossing system
- Withholding has already occurred under another provision, or
- The foreign resident vendor is under insolvency, administration, bankruptcy, a scheme of arrangement, a Part IX debt arrangement, insolvency agreement or similar arrangement under a foreign law.
The withholding can be avoided if:
- In relation to a TARP or a Company Title Interest, the vendor provides to the purchaser prior to settlement a Commissioner Certificate verifying they were an Australian resident at the contract date; or
- In relation to IARP, the vendor provides to the purchaser prior to settlement a Declaration in the prescribed form verifying either that they are an Australian resident, or the share or trust they are selling is not IARP, as at the contract date.
Application can also be made to the Commissioner for a variation to reduce the 10% withholding rate. Reasons for applying for a variation may include:
- The non-resident vendor will not make a capital gain from the disposal of the TARP, or IARP;
- The vendor and the purchaser may both be members of the same tax consolidated group;
- The non-resident vendor may have carry forward tax losses available to offset the capital gain;
- Because the 10% withholding rate is applied to the purchaser’s CGT cost base for the asset, an asset purchase from multiple (joint) vendors, not all of whom are residents or able to provide a Commissioner Certificate, will still require a full 10% withholding from all vendors. The only way of overcoming this inequity is to obtain a variation to limit the withholding to the TARP or IARP acquired from non-residents.
Settlement procedures will need to allow sufficient time for making applications to the ATO for a Commissioner Certificate or variation. These applications must be made on ATO prescribed forms. Any withholding tax must be paid to the ATO on or before the settlement date.
Contacts for TARP and IARP that will settle post 1 July 2016 should be reviewed for any WHT exposures and payment obligations.
These new measures will impose a non-final withholding tax, meaning the vendor will still have an obligation to lodge a tax return in relation to the CGT event but they’ll be entitled to a tax credit and perhaps even a tax refund (where relevant) for the withholding. You can expect that the ATO will be vigilant in chasing delinquent vendors who do not lodge tax returns disclosing CGT events for their disposal of TARP or IARP.