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  • Capital gains withholding – a guide for conveyancers

    This information explains the capital gains withholding impacts and what conveyancers need to consider.

    Foreign resident capital gains withholding first applied to vendors disposing of certain taxable Australian property under contracts entered into from 1 July 2016. A 10% non-final withholding applied to these transactions at settlement.

    New rules for foreign resident capital gains withholding (FRCGW) apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2017. The changes will apply to real property disposals where the contract price is $750,000 and above (previously $2 million) and the FRCGW withholding tax rate will be 12.5% (previously 10%). The existing threshold and rate will apply for any contracts entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017.

    Find out about:

    Changes

    Purchasers must withhold 12.5% of the purchase price and pay it to us if a vendor enters into a contract on or after 1 July 2017 and disposes of the following asset types:

    • Real property – taxable Australian real property with a market value of $750,000 or more
      • vacant land, buildings, residential and commercial property
      • mining, quarrying or prospecting rights where the material is situated in Australia
      • the grant of a lease over real property in Australia.
    • Other assets
      • indirect Australian real property interests in Australian entities whose majority of assets consist of the above mentioned asset types
      • options or rights to acquire any of the above asset types.

    Where any vendor disposes of Australian real property with a market value of $750,000 or more, the purchaser will be required to withhold 12.5% of the purchase price and pay it to us – unless the vendor provides the purchaser with an ATO-issued clearance certificate to ensure the amounts are not withheld from their sale proceeds.

    All property transactions with a market value of $750,000 or more will need the vendor and purchaser to consider if they need a clearance certificate.

    Purchase price

    In most cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, we will accept the purchase price as a proxy for market value.

    When purchasers must withhold

    The purchaser has an obligation to withhold when:

    • any vendor of the asset is a relevant foreign resident
    • the asset that the purchaser has acquired is a relevant asset
    • the acquisition is not an excluded transaction
    • the vendor does not provide a clearance certificate or make a relevant declaration.

    Vendors

    The obligation to withhold only arises if the vendor is a relevant foreign resident for the purposes of this measure.

    The vendor is the entity that holds the legal title to the asset to which this withholding measure applies.

    Where the asset is held on behalf of another entity, the vendor is the legal owner of the asset, for example, the trustee or custodian who holds the legal title on behalf of beneficiaries.

    Unless an exception applies, the vendor is a relevant foreign resident if any of the following apply:

    • The purchaser knows the vendor is a foreign resident.
    • The purchaser reasonably believes the vendor is a foreign resident.
    • The purchaser does not reasonably believe the vendor is an Australian resident, and either
      • has a record about the acquisition indicating that the vendor has an address outside Australia
      • is authorised by the vendor to provide a related financial benefit (for example, make a payment) to a place outside Australia (whether to the vendor or to anyone else).
    • The vendor has a connection outside Australia of a kind specified in the regulations.
    • The capital gains tax (CGT) asset to which the transaction relates is
      • taxable Australian real property
      • an indirect Australian real property interest, the holding of which causes a company title interest to arise.

    Exceptions

    A vendor is not a relevant foreign resident if they provide the purchaser with:

    • a valid clearance certificate in transactions involving taxable Australian real property or indirect Australian real property company title interests (even if the vendor is actually an Australian resident for other income tax purposes)
    • a valid vendor declaration in transactions involving other assets covered by the foreign resident capital gains withholding law.

    Taxable Australian real property or indirect Australian real property company title interests

    Where the capital gains tax (CGT) asset to which the transaction relates is taxable Australian real property or an indirect Australian real property company title interest, the entity is treated as a relevant foreign resident unless a clearance certificate is obtained from us certifying that the entity is not a relevant foreign resident for the purposes of this law.

    This rule applies even if the vendor is actually an Australian resident for other income tax purposes.

    Clearance certificates

    We may issue a certificate (known as a clearance certificate) stating that the vendor of taxable Australian real property or an indirect Australian real property company title interest is not a relevant foreign resident. The clearance certificate will specify that withholding is not required on the acquisition of the property.

    A clearance certificate is valid for 12 months from the date issued, so the vendor may be able to use it for multiple disposals of real property or indirect Australian real property company title interests that occur within that period. The vendor does not have to reapply for a clearance certificate each time they dispose of a property, as long as the clearance certificate is valid.

    The clearance certificate may be provided to the purchaser at any time during the transaction, but must be provided to the purchaser by settlement.

    The purchaser can rely on the clearance certificate as proof that they are not required to withhold. Once the purchaser has received a copy of the clearance certificate they have met their obligation, even if the vendor’s circumstances change during the settlement period.

    To obtain a clearance certificate, a vendor who is an Australian resident (or their representative) must complete an online Foreign resident capital gains withholding clearance certificate application form. To access the form, visit ato.gov.au/FRCGW.

    Conveyancers who are not legal practitioners or registered tax agents cannot complete the form on behalf of the vendor. They can either provide the PDF version of the clearance certificate form (or URL hyperlink) to the vendor for them to complete. Conveyancers may either submit the completed PDF form to us via mail or fax, or enter the data into the online form (retaining a copy of the vendor-signed PDF form and keeping a printout of data entered into the online form).

    Example 1: Resident entity treated as a foreign resident vendor

    Louis purchases real estate in Melbourne from Lucas for $3 million. This is taxable Australian real property. Louis believes that Lucas is an Australian resident.

    Despite Louis’s belief, unless Lucas provides Louis with a clearance certificate from us, Lucas is treated as a relevant foreign resident.

    Louis must make a withholding payment to us.

    End of example

     

    Example 2: Clearance certificate process

    Jennifer is acquiring an apartment in Sydney for $2.6 million from a vendor whose legal representatives are based in Singapore. The vendor’s Australian conveyancer has provided a clearance certificate obtained from us (for the vendor) to Jennifer.

    The contract instructions advise that the funds should be transferred to a bank account overseas.

    Jennifer and her representatives are certain they are acquiring the apartment from a foreign resident. Irrespective of this, the vendor has provided a valid clearance certificate to Jennifer. Jennifer is able to rely on this clearance certificate and does not have to withhold and pay any foreign resident capital gains withholding from the payment of $2.6 million.

    End of example

    How long will it take to get a clearance certificate?

    We are automating the process for issuing clearance certificates. Where an application is automatically approved, a clearance certificate will be issued within days of its submission. If there are data irregularities or exceptions, some manual processing may be required and the clearance certificate will be provided in 14 to 28 days. Higher risk and unusual cases may also require greater manual intervention, which could take longer.

    Clearance certificates will be sent by email if an email address is provided in the application. Otherwise clearance certificates will be mailed to the vendor and the vendor’s contact using the addresses provided in the application.

    To avoid unanticipated delays, vendors seeking a clearance certificate should apply through the online system as early as practical in the sale process. This could be before offering the property for sale.

    Clearance certificate validity

    A clearance certificate is valid for 12 months from the date of issue. It is only valid for the listed vendor and the period noted on it.

    Vendors must ensure that the details on their clearance certificate application are accurate, so the clearance certificate issues in the correct name.

    It is the vendor’s responsibility to provide the purchaser with the clearance certificate and ensure it is valid.

    For the purchaser to rely on the clearance certificate, the:

    • name of the vendor on the certificate must match the name on the certificate of title (unless proof of name change is provided)
    • date the certificate is given to the purchaser must be a date that falls within the clearance certificate period and must be provided before settlement.

    When a purchaser receives a clearance certificate from a vendor and sees that it is valid, they can rely on it and not withhold. There is no need for the purchaser to question the residency of the vendor.

    However, if the clearance certificate does not meet these conditions, the purchaser is required to withhold 12.5% of the purchase price.

    Although not a requirement, purchasers may check the validity of clearance certificates with us prior to deciding whether to withhold the 12.5% amount from the purchase price. Phone us on 13 28 66 (fast key codes 42) to confirm the validity of the clearance certificate by providing:

    • the number from the ‘Our reference’ field at the top of the certificate
    • the vendor’s name as it appears on the clearance certificate.

    What if there are multiple vendors?

    A clearance certificate only applies to the entity specified on the certificate. If an asset has multiple vendors, each vendor will need to supply the purchaser with a clearance certificate to ensure amounts are not withheld.

    Do the rules apply if the market value of the asset acquired is exactly $750,000?

    Yes, the transaction will only be excluded from the rules if the market value of the taxable Australian real property or company title interest acquired is less than $750,000.

    What if the market value is unknown?

    If the vendor is uncertain whether the $750,000 threshold will be reached, for example because the property is going to auction or a sales contract is yet to be signed, they can be conservative and apply for a clearance certificate. If the property is then sold for less than $750,000, the vendor does not need to provide the purchaser with the clearance certificate.

    Are disbursements and other costs part of the market value of the asset?

    We recognise that disposals of real property may involve the payment of disbursements as part of the contract.

    If the adjustment changes the consideration paid for the asset, then the calculation of the amount to be withheld should be based on the final adjusted purchase price.

    Where the purchase price is used as a proxy for market value, the market value is the purchase price before adjustment for any disbursements at settlement (for example, for council rates, water and sewer charges and strata levies). Therefore, the $750,000 threshold test is applied to the purchase price before adjustment for disbursements.

    Other assets

    For other assets, the purchaser’s decision about whether the vendor is a relevant foreign resident depends on whether the purchaser either:

    • has received one of two declarations which they do not know to be false, either
      • a residency declaration
      • a declaration that the membership interest is not an indirect Australian real property interest
    • knows, or has reasonable grounds to believe, the vendor is a foreign resident (referred to as the knowledge condition).

    A vendor may make a standing declaration which remains valid for six months after the day the declaration is made.

    The purchaser can rely on the declaration unless they know it to be false.

    Residency declarations

    The vendor will not be a relevant foreign resident where they have provided a declaration to the purchaser that they are an Australian resident (unless the purchaser knows it to be false).

    A declaration is only effective in relation to the specific vendor. If an asset is acquired from multiple vendors, a purchaser requires a declaration from each vendor or they must withhold.

    A declaration as to residency can be relied upon for:

    • indirect Australian real property interests (other than company title interests)
    • options and rights to acquire taxable Australian real property or indirect Australian real property interests.

    A purchaser can rely on a declaration, even if a purchaser has reasonable grounds to doubt its accuracy.

    However, if the purchaser knows the declaration is false, the declaration has no effect on the obligation to withhold. A purchaser will only know a declaration to be false if they have specific knowledge of the fact. That is, the purchaser must be a party to the fraud committed by the vendor or must have knowledge that the declaration is completely implausible.

    In all other circumstances, the declaration can be relied on.

    Declarations that the membership interest is not an indirect Australian real property interest

    A vendor can make a declaration that the CGT asset is a membership interest, but not an indirect Australian real property interest, because the membership interest does not satisfy either the:

    • non-portfolio interest test
    • principal asset test.

    Membership interests that are not indirect Australian real property interests are not within the scope of the law.

    The vendor is likely to be in a better position than the purchaser to determine whether the membership interests satisfy the tests for an indirect Australian real property interest.

    To support this, the obligation to withhold does not apply where the purchaser relies on a declaration by the vendor that the interests are not indirect Australian real property interests. A purchaser may rely on the declaration even though the declaration may be inaccurate, unless the purchaser has specific knowledge that the declaration is false.

    What if the vendor does not supply a declaration when requested?

    If the vendor does not supply a declaration when requested, the purchaser should withhold 12.5% from the purchase price at settlement.

    When is a declaration from a vendor valid?

    A vendor’s declaration is valid for six months from the date it is signed by the vendor. It is only valid for the listed vendor and specified period on the declaration.

    It is the vendor’s responsibility to provide the purchaser with a declaration and ensure it is valid at the time it’s provided.

    The purchaser can rely on the declaration if the:

    • name of the vendor on the declaration matches the name of the owner of the asset
    • date the vendor provides the declaration to the purchaser is a date that falls within the specified period on the declaration and is provided before settlement.

    When a purchaser receives a valid declaration from a vendor they can rely on it and not withhold.

    If the declaration does not meet these conditions, the purchaser must withhold 12.5% of the purchase price.

    Is there a declaration form?

    No, however a template that can be used is available for download from our website at ato.gov.au/FRCGW.

    What if there are multiple vendors?

    A declaration is only valid for the vendor specified in the declaration. If an asset is acquired from multiple vendors, each vendor would need to provide the purchaser with their own declaration to ensure that the withholding obligation does not apply to each of them.

    Declarations and the disposal of real property

    A vendor cannot use a declaration to avoid having the purchaser withhold the 12.5% withholding in relation to the disposal of real property.

    Penalties for false declarations

    A vendor who makes a declaration that is false or misleading will have a penalty imposed upon them by us. The amount of the penalty varies depending on the severity of the offence.

    The knowledge condition

    The purchaser only has to consider the knowledge condition if the vendor has not supplied a vendor declaration.

    The knowledge condition is satisfied where the purchaser:

    • has specific knowledge that the vendor is a foreign resident – for example, the purchaser will have specific knowledge if the vendor discloses that they are a foreign resident for income tax purposes
    • reasonably believes that the vendor is a foreign resident – for example, the purchaser may have a reasonable belief if they learn the vendor is likely to be living overseas
    • has no reasonable grounds to believe the vendor is an Australian resident, and the amount is to be paid outside Australia, or the vendor has a foreign address.

    Where there are reasonable grounds to believe the vendor is an Australian resident, withholding will not be required, even if an amount is paid outside Australia, or the vendor has an address outside Australia.

    Reasonable grounds to believe the vendor is (or is not) an Australian resident must be considered on an objective basis. The question is whether a reasonable person in the position of the purchaser would have thought there were reasonable grounds to support this belief.

    If the purchaser does not know or have reason to believe the vendor is a foreign resident, the knowledge condition ensures that the obligation to pay an amount to us does not arise. This provides certainty to purchasers.

    Purchasers who are not comfortable applying the knowledge condition can ask the vendor to supply a vendor declaration. If the vendor does not supply a valid vendor declaration then the purchaser can assume the vendor is a relevant foreign resident and that they must withhold.

    Example 1: Declaration used to determine residency

    Andrew enters into an off-market transaction to acquire all the shares in a company. The majority of the company’s investments are in real property holdings throughout Australia. The shares, therefore, constitute indirect Australian real property interests.

    Andrew does not know the vendor of the shares. Under the terms of the sale contract, Andrew is to transfer the purchase price of the shares to an overseas bank account in the name of an associate of the vendor.

    At this stage, the knowledge condition is satisfied. Andrew notifies the vendor that he intends to withhold a portion of the purchase price unless the vendor can provide Andrew with a declaration.

    The vendor provides Andrew with a declaration stating the vendor is an Australian resident for income tax purposes, which Andrew does not know to be false. The knowledge condition is no longer relevant because Andrew has a declaration that the vendor is an Australian resident, that he is entitled to rely on.

    Even if Andrew could not verify the declaration to the extent necessary for him to have a reasonable belief in its accuracy, he could rely on it and no withholding and payment obligation would arise.

    End of example

     

    Example 2: Vendor declaration that they are a resident

    Zack and Belinda enter into an off-market transaction to acquire all of the shares in a company from a friend of their family. The majority of the company’s investments are in real property holdings throughout Australia. The shares, therefore, constitute indirect Australian real property interests.

    The friend has not provided a declaration to Zack or Belinda stating that the shares are not an indirect Australian real property interest, or that the friend is an Australian resident.

    In deciding if they need to withhold from the payment, Zack and Belinda consider their relationship with the vendor. They have known the family friend for many years, and have no reason to think the family friend has an address outside Australia. They also take into account the fact that the funds were to be paid into an Australian bank account.

    Consequently, Zack and Belinda are satisfied they have met the knowledge condition, as they reasonably believe the family friend to be a resident. Hence, they do not withhold.

    End of example

    Assets

    The law applies to the following assets:

    • taxable Australian real property
    • an indirect Australian real property interest
    • an option or right to acquire such property or such an interest.

    The law only applies to these assets. Transactions involving other assets that are taxable Australian property are not subject to withholding, for example, an asset used in running a business through an Australian permanent establishment is excluded.

    Example: Relevant assets

    Foreign resident Hank owns a range of assets in Australia which he has decided to dispose of to fund an investment in the USA. The assets are:

    • a residential block of apartments in Melbourne
    • a portfolio of shares in an ASX200 listed index fund
    • the inventory from a manufacturing business in Sydney
    • a mining tenement allowing exploration within North Queensland
    • a lease on agricultural land in the Murray River Basin
    • an option to acquire shares in a carpet cleaning business.

    The residential block of apartments is a relevant asset. It is taxable Australian real property, being land or buildings situated within Australia.

    The portfolio of shares in an ASX listed fund is not a relevant asset. The law excludes transactions made on an approved stock exchange.

    The inventory is not a relevant asset. Inventory is not taxable Australian real property and not an indirect Australian real property interest.

    The mining tenement is a relevant asset. It is taxable Australian real property, the definition of which includes ‘a mining, quarrying or prospecting right’.

    The lease on agricultural land is a relevant asset. A lease of land is specifically included within the definition of taxable Australian real property.

    The option is not a relevant asset. The asset that the option relates to is not taxable Australian real property or an indirect Australian real property interest.

    End of example

    Taxable Australian real property

    A CGT asset will be taxable Australian real property if it is:

    • real property situated in Australia (including a lease of land, if the land is in Australia)
    • a mining, quarrying or prospecting right (to the extent that the right is not real property) if the minerals, petroleum or quarrying materials are in Australia.

    For the purposes of this measure, real property includes vacant land, buildings, residential and commercial property, and indirect Australian real property interests, the holding of which causes a company title interest to arise.

    Indirect Australian real property interest

    For a membership interest in an entity to be an indirect Australian real property interest at a particular time, the membership interest must satisfy two tests, being both:

    • the non-portfolio interest test
    • the principal asset test.

    Membership interest includes shares in a company.

    The non-portfolio interest test

    An interest held by an entity (the holding entity) in another entity (the test entity) is a non-portfolio interest if the sum of the membership interests held by the holding entity (and their associates) in the test entity is 10% or more.

    The test is satisfied if the membership interest is a non-portfolio interest at the time of the transaction, or through a 12-month period in the last 24 months leading up to the transaction.

    The principal asset test

    The principal asset test is used to determine if an entity’s underlying value is principally derived from Australian real property.

    A membership interest in an entity passes the principal asset test if the sum of the market value of the entity’s assets that are taxable Australian real property exceed the sum of the market value of the assets that are not.

    Example: Applying the non-portfolio interest and principal asset tests

    Foreign resident Kimiko has held a 15% interest in an Australian mining company from an initial purchase offer in 2011. With the downturn in commodity prices she has sold 8% of that interest.

    Will this sale be subject to the withholding regime? A valuation of the mining company’s assets was undertaken at the time of the sale. It provides that the market values of the assets are:

    • mining rights $1.7 million
    • plant and equipment $4.1 million
    • mining information $2.8 million
    • land $5 million.

    Non-portfolio interest test

    At the time Kimiko disposed of her interest in the mining company, she held a 15% interest. This satisfies the requirement that the interest be 10% or above.

    That she has only disposed of 8% of its interest in the mining company has no bearing on the non-portfolio test. It is the interest held at the time of the disposal that is the key factor. As long as that is at least 10%, any disposal of that interest can be subject to the withholding.

    Principal asset test

    The assets of the mining company that are taxable Australian real property are the land and the mining rights. The mining information and plant and equipment (assumed for this example) do not come within the scope of taxable Australian real property.

    This means the market values of the taxable Australian real property of the mining company is $6.7 million and of the other assets $6.9 million.

    As the sum of the market values of the non- taxable Australian real property assets exceeds that of the taxable Australian real property, then the principal asset test is not satisfied.

    Consequently, the 8% interest that Kimiko has disposed of is not an indirect Australian real property interest, so no foreign resident capital gains withholding would apply to the disposal by the foreign resident.

    End of example

    Options and rights to acquire certain assets

    An option or right to acquire property is a CGT asset of the holder of the right. Where an option or a right is granted by a foreign resident over taxable Australian real property or an indirect Australian real property interest, the granting of the option or right will be subject to withholding.

    Where the purchaser subsequently acquires the asset from the foreign resident as a result of exercising the option, the amount to which the 12.5% withholding applies is the amount paid for the asset, disregarding any amount the purchaser paid for the option, including the market value of any property they gave for the option (or to renew or extend the option).

    Example: Exercise of an option

    Australian company Oz Co acquires an option from a foreign resident entity, giving it the right to purchase a commercial property for $62 million within 18 months of taking the option.

    Oz Co then pays $4 million, withholds $500,000 and pays this to us.

    14 months after the option purchase date, commercial property prices increase to such an extent that Oz Co decides to exercise the option and acquire the property for $62 million.

    All the conditions are met for the foreign resident capital gains withholding to occur. The law ensures that Oz Co only withholds from $58 million, being the $62 million contract price less the $4 million paid for the option. Oz Co withholds and pays $7.25 million to us.

    End of example

    Excluded transactions

    The law excludes certain transactions from the obligation to withhold. The vendor will need to determine their income tax or capital gains tax obligations when completing their income tax return.

    Taxable Australian real property valued at under $750,000

    The law excludes transactions involving taxable Australian real property with a market value of less than $750,000. The exclusion applies for all taxable Australian real property, including residential premises, commercial property, vacant land, leasehold, easements, covenants, mortgages and stratum title schemes.

    In most cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, we will accept the purchase price as a proxy for market value.

    Example 1: The $750,000 threshold

    Foreign resident Juan sells his bayside mansion. The contract is signed on 2 July 2017 for a sale price of $690,000. Juan and the purchaser were unknown to each other, and the transaction occurred through their legal and conveyancing representatives.

    In many cases a purchase price negotiated between a purchaser and vendor, acting at arm’s length, would be the same as the market value and it would not be necessary for the purchaser to seek a separate expert valuation. In these cases the purchase price may be used as a proxy for market value.

    As a result, no withholding is required in this instance.

    End of example

     

    Example 2: How the $750,000 threshold applies with multiple purchasers

    Four residents purchase a small apartment complex for $2.8 million from a foreign resident with whom they have no existing relationship. The respective purchaser interests are 45%, 25%, 18% and 12%.

    Is withholding to be imposed?

    If the withholding obligation is considered for each purchaser in isolation to the others, it would be shown that purchaser one is paying $1.26 million for their share of the apartment complex. Each of the other three purchasers is paying less than $750,000 for their respective interests.

    The measure requires the market value of all purchasers to be aggregated in examining whether the $750,000 market value threshold has been reached.

    As the aggregated purchase price (market value) from all the purchasers is $2.8 million, each purchaser must withhold an amount in proportion to their percentage of the total purchase price.

    In total $350,000 must be withheld and paid to us.

    End of example

    Company title interests valued at under $750,000

    The law excludes transactions involving membership interests that cause a company title interest to arise where those membership interests have a market value of less than $750,000.

    This aligns the treatment for entities that own property through company title with the treatment for those that own property through strata title.

    Other indirect real property interests do not fall within this exclusion.

    Transactions on an approved stock exchange

    The law excludes transactions made on an approved stock exchange.

    The nature of these transactions makes it impossible for a purchaser to determine the identity and residency status of the vendor.

    Example: Sales on an approved stock exchange

    Foreign resident Xing Xi owns shares in two Australian entities. His interests meet the requirements to be indirect Australian real property interests. One interest is listed on Chi-X Australia and the other is listed on the Australian Securities Exchange (ASX).

    Chi-X Australia and the ASX are approved stock exchanges. Therefore the transactions are not considered for the purposes of this withholding measure.

    End of example

    Transactions on a crossing system

    The law excludes from withholding any transactions conducted using a crossing system.

    A crossing system (also known as a ‘dark pool’) is a system that enables trading off-market, although the trades are typically reported to the market immediately after they take place.

    As with transactions that occur on an approved stock exchange, it may not be possible for a purchaser to determine the identity and residency status of the vendor.

    Other withholding obligations

    The law excludes transactions that are subject to another withholding obligation.

    The intention is that foreign resident capital gains withholding be a withholding regime of last resort. Therefore, the law does not apply where another withholding obligation applies to the transaction.

    Securities lending arrangements

    A ‘securities lending arrangement’ is an arrangement where a holder of securities agrees to provide its securities to a borrower for a specified period of time, with an associated agreement by the borrower to return equivalent securities at the end of the agreed period. These arrangements are typically entered into for purposes such as short-selling or hedging.

    The law excludes such transactions.

    External administration and bankruptcy

    The law excludes transactions where the vendor is in external administration or transactions arising from the administration of a bankrupt estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law.

    Varying the amount to be withheld

    The amount to be withheld can be varied by us or at the initiative of a party with an interest in a transaction, including a creditor. This supports the principle whereby we must take a creditor’s rights into account.

    Vendors can apply for a variation where the following apply:

    • they are not entitled to a clearance certificate
    • a vendor’s declaration is not appropriate
    • 12.5% withholding is too high compared to the actual Australian tax liability on the sale of the asset.

    Reasons for a variation could include instances where:

    • the foreign resident will not make a capital gain on the transaction (for example, because they will make a capital loss or a CGT rollover applies)
    • the foreign resident will otherwise not have an income tax liability (for example, because of carried-forward capital losses or tax losses)
    • there are multiple vendors, only one of whom is a foreign resident
    • a creditor of the vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures.

    Example 1: Vendor applies for variation

    Foreign resident Victor is selling a commercial property located in Australia with a cost base of $3 million.

    Victor does not expect to be able to sell the property for $3 million or more (that is, he expects to make a capital loss on the sale).

    Victor applies to us for a variation.

    We issue a variation notice to Victor under which the amount to be withheld is reduced to nil.

    The variation is subject to the condition that the purchase price for the property does not exceed $3 million.

    Paul then agrees to purchase the property from Victor for $2.9 million. Victor provides a copy of the variation notice to Paul. The variation takes effect and Paul does not withhold any amount.

    End of example

     

    Example 2: Variation to meet a secured creditor obligation

    Foreign resident Daniel owns a commercial property located in Australia. He owes $2.9 million to a bank, secured by a mortgage over the property. Daniel and the bank are not related parties. Daniel has met all his loan obligations and there is nothing to suggest he will not continue to do this.

    Daniel enters into a contract to sell the property for $3 million. The purchaser knows Daniel is a foreign resident, and that they would normally be required to withhold $375,000 and pay that amount to us.

    If they do so, Daniel won’t have sufficient sale proceeds to discharge the mortgage. Daniel is entitled to apply for a variation. We would work with Daniel and the bank to achieve a sensible outcome.

    End of example

     

    Example 3: Creditor applying for a variation

    Foreign resident Chris owns a commercial property located in Australia. He owes $3 million to a bank, secured by a mortgage over the property.

    Chris’s business has been performing poorly and he has missed a number of loan repayments. The bank decides to take possession of the property and exercise its power of sale.

    The property is sold for $2.9 million net of costs. The proceeds are insufficient to withhold the 12.5% to be paid to us and to discharge Chris’s mortgage.

    Chris prefers us to be paid rather than the bank, because he would be entitled to a credit for this amount withheld. Therefore, he does not apply for a variation (even though one may be available if he made a capital loss).

    The bank is entitled to apply for a variation and does so.

    We consider the circumstances and conclude that requiring an amount to be withheld and paid to us would prevent the bank from recovering the debt from its secured interest.

    We issue a notice to the bank varying the amount to be withheld to nil.

    The bank provides a copy of the notice to the purchaser. The purchaser is relieved of any obligation to withhold and pay an amount to us.

    End of example

    How to apply for a variation

    To apply for a variation, the vendor or vendor’s creditor needs to complete the online Foreign resident capital gains withholding rate variation application form. To access the form, visit ato.gov.au/FRCGW.

    If the vendor hasn’t lodged a variation certificate online, conveyancers (who are not legal practitioners or registered tax agents) cannot complete the form on behalf of the vendor. They can provide either the PDF version of the variation form (or hyperlink) to the vendor for completion. Conveyancers may submit the completed PDF form to us via mail or fax, or enter the data into the online form (retaining a copy of the vendor-signed PDF form and keeping a printout of data entered into the online form).

    How long will it take to obtain a variation notice?

    In the majority of cases (where we have received all the required information) a variation notice will be issued within 28 days.

    Variation notices will be sent by email if an email address is provided in the application. Otherwise notices will be mailed to the vendor and the applicant using the addresses provided in the application. The variation notice should be shown to the purchaser before settlement to ensure the reduced withholding rate applies.

    Calculating the reduced rate of withholding

    Vendors need to calculate their reduced rate of withholding. This could be a rate between nil and 12.49%.

    Any varied rate approved by us will depend on the information provided by the vendor in their application.

    Variation notices and multiple vendors

    A variation notice applies to the specified vendor and applicable asset on the notice. If an asset is acquired from multiple vendors, each vendor will need to supply the purchasers with separate variation notices if a reduced rate of withholding is to apply to each vendor.

    Variation notice validity

    A variation notice is valid for 12 months from the date of issue for the listed vendor and applicable asset on the notice.

    Vendors must ensure the details on their application are accurate so the variation notice issues with the correct vendor and applicable asset details.

    It is the vendor’s responsibility to provide the purchaser with the variation notice and ensure it is valid at the time of settlement.

    For the purchaser to rely on the variation notice the:

    • name of the vendor and applicable asset details on the notice must match those on the certificate of title or other asset ownership documentation
    • settlement date must be on or before the expiry date on the variation notice.

    When a purchaser receives a valid variation notice from a vendor they can rely on it and not withhold.

    If the variation notice does not meet the above-mentioned conditions, the purchaser is required to withhold 12.5% of the purchase price.

    A purchaser can check the validity of a variation notice with us prior to deciding whether to withhold the 12.5% amount from the purchase price. Phone us on 13 28 66 (fast key codes 4, 2) to confirm the validity of the variation notice, by providing the:

    • number from the ‘Our reference’ field at the top of the notice
    • vendor’s name, varied rate and applicable asset details as they appear on the notice.

    Calculating the amount to withhold

    Where a purchaser has determined they have an obligation to withhold, they must withhold 12.5% (or a varied rate as per a valid variation certificate) from the ‘first element of the cost base’ of the asset.

    The first element of the cost base is an existing tax concept which is the amount of money paid (or required to be paid) or the market value of any property given (or required to be given) to acquire the asset.

    However, as purchase price is understood by vendors and purchasers, and in many instances will be equal to the first element of the cost base, where the transaction is at arms-length, the purchase price may be used in determining how much withholding is required.

    We recognise that some assets subject to this withholding measure may involve the payment of disbursements as part of the contract. Where the purchase price is used as a proxy for market value, the market value is the purchase price before adjustment for any disbursements at settlement (for example, for council rates, water and sewer charges and strata levies). Therefore, the $750,000 threshold test for taxable Australian real property is applied to the purchase price before adjustment for disbursements.

    Example: How much to withhold and pay

    Claudia is buying a house where the contract price is $3.3 million. She has been advised by the vendor’s representative that the vendor is a foreign resident.

    Depending upon the particulars of the contract, the $3.3 million may be comprised of the purchase price for the property, plus a number of other costs associated with the property that Claudia has agreed with the vendor to pay for.

    In this case Claudia advises that they are withholding based upon the contracted purchase price of the property. Therefore the first element of the cost base is assumed to be the same as the purchase price; this means the purchase price is used to determine the amount to be withheld.

    Claudia therefore withholds $412,500 (12.5% of $3.3 million).

    End of example

    Multiple purchasers

    Where there are multiple purchasers, each purchaser does not look at their percentage interest in isolation to the other purchasers in determining whether they should withhold. Each purchaser must withhold in proportion to their percentage of the total purchase price.

    Where the asset being disposed of is taxable Australian real property, the market value of all purchasers’ interests must be aggregated in examining whether the $750,000 market value threshold has been reached. If the aggregated purchase price is $750,000 or more, each purchaser must withhold in proportion to their percentage of the total purchase price.

    Example: Multiple purchasers

    You are purchasing a commercial property jointly with another entity. Your share of the acquisition is 40%, for which you are paying $675,000. This means the total property purchase price would be $1.5 million.

    Even though your purchaser’s interest is below the $750,000 threshold, the property as a whole exceeds the $750,000 threshold – so you will need to withhold $84,375.

    End of example

    Multiple vendors

    If multiple vendors are disposing of an asset, the total market value of the asset determines whether withholding is required by the purchaser.

    If the purchaser has not been provided with a clearance certificate, vendor declaration or a variation from any of the vendors, the purchaser must withhold 12.5% of the purchase price. The amount of withholding will be in proportion to each vendor’s interest in the asset.

    Where one (but not all) of the vendors provides a clearance certificate or vendor declaration to the purchaser, the withholding obligation still applies as there is still a foreign resident vendor to the transaction. The amount of withholding is still on the entire first element of the cost base of the asset, not just the portion that is attributable to the relevant foreign resident vendor’s interest in the asset.

    We recognise that in this situation, any vendors that are subject to the withholding would apply for a variation to ensure that the withholding amount better reflected the foreign resident vendor’s tax liability. They would receive a reduction in the withholding rate accordingly.

    To reduce the need for vendors to apply for variations in these situations, our approach is that where there are multiple vendors, the purchaser may withhold in accordance with each vendor’s proportional interest in the purchase price, subject to any clearance certificate, vendor declaration or vendor variation being provided prior to settlement.

    The following situations are from the perspective of a purchaser who is deciding what to do in terms of withholding. In all instances it is assumed the purchase price is $750,000 or more.

    Example 1: Joint owners but only one vendor is an Australian resident

    The purchaser has to withhold as a vendor is deemed to be a foreign resident. The purchaser would need to see a clearance certificate from the Australian resident vendor. If the clearance certificate is not provided by settlement then the purchaser has to withhold an amount form both vendors.

    However, if a clearance certificate is provided before settlement by the Australian resident, the purchaser only has to withhold from the foreign resident vendor. The withholding would normally be on the full purchase price of the property – but we are allowing the withholding amount to be calculated on the foreign resident’s interest in the purchase price only.

    End of example

     

    Example 2: Foreign resident vendor provides a variation

    The circumstances are identical but now the foreign resident vendor provides the purchaser with a variation notice and the Australian vendor provides a clearance certificate. The purchaser does not have to withhold an amount from the Australian resident. The purchaser has to withhold from the foreign vendor, but the rate of withholding is not 12.5% but the withholding rate is as specified on the variation notice issued by us to the foreign resident vendor.

    End of example

     

    Example 3: Multiple foreign resident vendors

    As the property is being sold by foreign residents the purchaser knows they must withhold. The purchaser has not received a clearance certificate, and therefore must assume all the vendors are foreign residents.

    Absent any variation notices, the purchaser must withhold from each foreign resident vendor an amount based on their proportionate interest in the property – that is, 12.5% of their share of the purchase price. The sum of the withholding amounts should equal 12.5% of the full purchase price.

    However, if some or all of the foreign resident vendors provide the purchaser with a variation notice, the purchaser must apply the specified withholding rate to that vendor’s share of the purchase price. For example, it may be that the purchaser has to withhold 8% from one vendor, and 3% from another vendor.

    The purchaser will need to ensure that the correct amount is withheld from each vendor.

    End of example

    Multiple properties in one transaction

    A vendor may be disposing of multiple properties in one transaction, the combined value of which exceeds $750,000. The withholding is based on the market value of a property being disposed of – not a combination of all the properties being disposed of.

    Is the withholding an additional payment on top of the agreed purchaser price?

    No, the obligation for the purchaser to withhold an amount and pay it to us is not an additional payment on top of the agreed purchase price. The withholding amount is taken from the amount of purchase price that the purchaser has agreed to pay the vendor.

    A purchaser that withholds in accordance with their Australian income tax obligations is protected by sub-section 16-20(2) of Schedule 1 of the TAA. This discharges the purchaser from their liability to pay this part of the total purchase price directly to the vendor.

    Is withholding required at the time of paying deposits or instalments?

    No, withholding is not required from deposits paid on signing of the contract. No payment is required when the purchaser signs the contract and pays the deposit. The purchaser is not required to pay the Commissioner until the day the purchaser becomes the owner of the asset, that is, on settlement.

    If payments are to be made in multiple instalments across the contract period, withholding should only occur when the final payment is made at settlement. The withholding amount is still calculated using the full purchase price of the asset.

    What happens if the contract doesn’t settle?

    If for some reason the contract is not completed (settled), there is no obligation on the purchaser to withhold. This is because the purchaser has not become the owner of the asset, and therefore there is no obligation to pay an amount to us.

    What if the purchaser fails to withhold?

    If the purchaser fails to withhold when they should, a penalty may be imposed by the Commissioner which is equal to the amount that was required to be withheld and paid. General interest charges will also be applied.

    Goods and services tax

    Market value

    The $750,000 threshold for real property is based upon the ‘market value’ of that property. Market value can be affected by the income tax law which provides that the market value of an asset at a particular time (in this case just after the transaction) is reduced by the amount of any input tax credit the purchaser is entitled to, assuming that both:

    • the asset had been acquired at the relevant time
    • the acquisition had been solely for a creditable purpose.

    Consequently, on the basis that the parties are acting at arm’s length:

    • Where a purchaser is not registered for goods and services tax (GST), or the supply of the asset is not a taxable supply, or the purchaser is not able to claim an input tax credit on the purchase, the GST-inclusive purchase price payable by the purchaser may be used as a proxy for the market value of the asset.
    • Where the purchaser is registered for GST and the transaction is a taxable supply, and the purchaser is able to claim an input tax credit on the purchase, the GST-inclusive purchase price less the input tax credit may be used as a proxy for the market value of the asset.

    The sale of existing residential premises (but not commercial residential premises or new residential premises) is input taxed and therefore not a taxable supply. Where the asset is shares (for example company title interests), the supply of shares is input taxed and therefore not a taxable supply.

    • If the margin scheme is used, a purchaser cannot claim input tax credits on that acquisition, even if they are registered for GST and intend to use the purchased property for a creditable purpose. In these instances, a GST-registered purchaser should calculate the 12.5% withholding by using the GST-inclusive price.

    Example: Determining market value when GST is involved

    Edwina is a successful entrepreneur in the manufacturing industry. She acquires a vacant Sydney commercial property for $5.3 million to expand her business. She knows the vendor is a foreign resident, because she had not received a clearance certificate at settlement.

    What is the market value for determining the withholding amount?

    Edwina is registered for GST as her manufacturing business generates turnover that requires this.

    GST has been included in the contract to buy the commercial property, and equals 1/11th of the total purchase price of $5.3 million that Edwina paid. She holds a valid tax invoice for the purchase.

    The commercial property is to be used for expanding Edwina’s manufacturing business, so it will be used for a creditable purpose. That is, used by Edwina in her enterprise of making taxable supplies of manufactured goods.

    Consequently, the market value upon which Edwina will withhold is $5.3 million minus the GST that has formed part of the purchase price.

    For a fully taxable supply, GST = 1/11th of the purchase price, so the market value will equal 10/11ths of $5.3 million – or approximately $4.82 million.

    End of example

    GST and the first element of the cost base

    The 12.5% withholding rate is to be applied against the ‘first element of the cost base’ of the asset that the purchaser is acquiring.

    However, as purchase price is understood by vendors and purchasers, and in many instances will be equal to the first element of the cost base, where the transaction is at arm’s length the purchase price may be used to determine how much to withhold.

    The actual purchase price may depend upon whether or not a purchaser is registered (or is required to be registered) for GST. The following should be taken into account:

    • Where the purchaser is registered for GST and the transaction is a taxable supply, and the purchaser is able to claim an input tax credit on the purchase, the first element of the cost base can be reduced by the amount of any GST net input tax credits (that is, GST the purchaser can claim back) included in the cost.
    • Where a purchaser is not registered for GST or the supply of the asset is not a taxable supply, or the purchaser is not able to claim an input tax credit on the purchase, the purchaser does not make any adjustment; the GST is included in the first element of the cost base.

    The sale of existing residential premises (but not commercial residential premises or new residential premises) is input taxed and therefore not a taxable supply. Where the asset is shares (for example, company title interests), the supply of shares is input taxed and therefore not a taxable supply.

    • If the margin scheme is used, you cannot claim input tax credits on that acquisition, even if you are registered for GST and intend to use the purchased property for a creditable purpose. GST-registered purchasers should calculate the 12.5% withholding by using the GST-inclusive price in the first element of the cost base.

    Example: Determining the cost base when GST is involved

    Xavier is registered for GST and is acquiring a retail building that is already tenanted. The vendor did not agree in writing to supply the building as a GST-free going concern, so the supply is fully taxable. The GST- inclusive price as per the contract is $3.7 million.

    Xavier knows from paying for financial advice from a reputable accounting firm that he will be entitled to claim back input tax credits from this transaction as long as he holds a valid tax invoice for the purchase.

    At settlement no clearance certificate has been provided by the vendor.

    Xavier knows he has to withhold but is concerned as to what amount it should be based on, as the financial advice he received is quiet on this matter.

    Xavier has confirmation he can claim input tax credits reflecting the GST he has paid as part of the contract to acquire the building.

    Given the vendor has failed to present a clearance certificate, Xavier knows he must potentially withhold, depending upon what the ‘first element of the cost base’ of the retail building is.

    There is nothing to suggest this transaction is not an arm’s length arrangement, so the purchase price can be used as a proxy for the ‘first element of the cost base’.

    Xavier is registered for GST and at settlement obtained a valid tax invoice for the transaction showing the purchase price and the GST amount included in that price.

    To work out the market value, Xavier deducts the GST he is entitled to claim back as an input tax credit. The tax invoice indicates the input tax credits total $336,363 (that is, 1/11th of $3.7 million).

    Consequently, the 12.5% withholding is to be applied to $3.7 million less $336,363 = $3,363,637.

    End of example

    See also:

    Paying the ATO

    The purchaser must pay the required amount to us on or before the day they become the owner of the property.

    No withholding and payment obligation arises if the contract falls through and change in ownership does not occur.

    In recognition of the practicalities of making payment at settlement, we will allow a short period after settlement to receive payment before imposing general interest charges and initiating recovery action.

    Example: When to pay

    Ben acquired a residential property for $3 million. If the vendor does not provide Ben with a clearance certificate by settlement, Ben knows the vendor of the property will be classed as a foreign resident and that he has a withholding obligation.

    Ben entered into the contract for the purchase of the property on 1 July 2017 and paid a $150,000 deposit.

    The contract was settled on 1 October 2017 when Ben was required to pay the balance of $2.85 million to the vendor in return for receiving legal title to the property. Ben will withhold $375,000 from the settlement amount (paying $2.475 million to the vendor).

    Ben is required to pay the $375,000 to us on or before the day he receives legal title to the property – 1 October 2017.

    End of example

    How to pay

    The purchaser can pay using any of the following methods:

    • Electronic funds transfer – transfer the amount via EFT to
      • Bank: Reserve Bank of Australia
        BSB: 093 003
        Account number: 316 385
        Account name: ATO direct credit account
        Reference: Your payment reference number.
    • In person at any Australia Post outlet
      • The purchaser will need the payment slip and barcode supplied to them after lodging the Foreign resident capital gains withholding purchaser payment notification. Australia Post accepts cheques up to $100 million.
    • Mail a cheque with your payment reference number (the payment slip is helpful but not compulsory) to us at
      • Australian Taxation Office
        Locked Bag 1936
        ALBURY NSW 1936
        AUSTRALIA.

    Notifying us about payment

    When an amount is withheld, all purchasers involved in the sale must complete a Foreign resident capital gains withholding purchaser payment notification form (NAT 74884). Where there are multiple purchasers one form can be used if there are 10 or fewer purchasers or purchasers can lodge a form individually. The purchaser (or purchasers) needs to provide the details of the vendors and the asset in their application.

    To access the form and instructions, visit ato.gov.au/FRCGW.

    Once a payment notification form is processed, a payment reference number (PRN) will be issued, along with a PDF icon that can be clicked on to obtain a downloadable payment slip and barcode to use at Australia Post.

    Only one PRN is issued per purchaser payment notification form, even if multiple purchasers are supplied on the form.

    The full payment can be made using the PRN or payment slip provided. Where two or more purchasers are included in the transaction, they can choose to make separate payments and use the same PRN or payment slip.

    The payment notification form may allow the purchaser to quote the vendor’s tax file number (TFN) if the vendor has provided one. Under the law, purchasers may collect TFNs from foreign residents (where they have them) and provide them to us. This will assist us with matching withholding payments to specific foreign residents.

    We encourage you to submit your payment notification form to us as early as possible to ensure you have your PRN at settlement.

    What happens after payment has been made

    A receipt from either Australia Post or us is proof that the purchaser has made the payment and fulfilled their obligations.

    A payment confirmation email or letter will be sent to the nominated contact on the purchaser payment notification form. Confirmation will be sent by email if an email address is provided in the Foreign resident capital gains withholding purchaser payment notification form. Otherwise it will be mailed to the address of the contact.

    Vendors will need a copy of the payment confirmation and use this information to claim a credit for the withholding amount when completing their income tax return.

    Leases

    A lease is a CGT asset that is taxable Australian real property. Therefore, the acquisition of a lease from a foreign resident vendor with a market value of $750,000 or more would be subject to the 12.5% withholding, unless the lessor provided the lessee with a clearance certificate.

    However, the withholding obligation only arises with respect to any lease premium paid by the lessee to acquire the lease, as they form part of the first element of the cost base of the lease.

    A lease that does not include the payment of a premium will not result in a withholding liability.

    Rent payable under the term of the lease does not form part of the first element of the cost base.

    Example: Granting a lease

    Foreign resident Richard owns a commercial property that he leases to Leigh. As a foreign resident, Richard is not entitled to a clearance certificate.

    Under the terms of the lease, Leigh agrees to pay Richard $3 million as a premium for granting the lease and to pay periodic rent of $4,000 a month.

    The first element of the cost base of Leigh’s lease asset is $3 million. Leigh must withhold and pay 12.5% of this amount ($375,000) to us.

    The rent payable under the lease does not form part of the first element of cost base.

    End of example

    Withholding tax credits and refunds

    Withholding tax credits

    A foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income and including any capital gain from the disposal of their asset. The vendor will claim a credit for any withholding amount paid to us by the purchaser in their tax return.

    The availability of a credit to a foreign resident is contingent on the purchaser paying the amount to us. A credit does not arise merely because an amount has been withheld.

    A foreign resident vendor disposing of Australian property to which these withholding tax rules apply should apply for a tax file number (TFN) before they lodge an Australian tax return. This will ensure they can claim a credit for the amount withheld and paid to us by the purchaser.

    In certain circumstances, an early income tax return may be submitted. If a foreign resident vendor is not eligible to submit an early income tax return, they must wait until the end of the financial year to do so, and receive a tax credit for the withholding paid by the purchaser.

    Refunds

    We may refund an amount incorrectly withheld and paid by the purchaser. The vendor cannot claim a refund from the purchaser.

    Penalties for non-compliance

    Under this measure, the purchaser must both withhold and pay that withholding to us, even if they use representatives to assist them in the process.

    Administrative penalties apply for failure to adhere to the foreign resident capital gains withholding legislation.

    The offence provision for failing to withhold also applies.

    A general interest charge is imposed for amounts not paid to us by the required date.

    It is an offence to falsely claim a credit.

    The law imposes penalties of up to 120 penalty units for declarations or purported declarations that are false or misleading in a material particular.

    Glossary

    Indirect Australian real property interest

    Where two tests are satisfied: the non-portfolio interest test, and the principal asset test. Indirect Australian real property interest includes shares in a company or units in a trust.

    Knowledge condition

    Where the purchaser knows, or has reason to believe, that the vendor is a relevant foreign resident.

    Non-final withholding tax

    A non-final withholding tax is collected as an estimate of the recipient’s final income tax liability. The recipient is still required to lodge an income tax return and pay any outstanding debit. They claim a credit for the amount of tax withheld in the income tax return at this time.

    Non-portfolio interest test

    An interest held by an entity (the holding entity) in another entity (the test entity) is a non-portfolio interest if the sum of the membership interests held by the holding entity (and their associates) in the test entity is 10% or more.

    The test is satisfied if the membership interest is a non-portfolio interest at the time of the transaction, or through a 12-month period in the last 24 months leading up to the transaction.

    Relevant asset (also referred to ‘assets that the law applies to’ in this guide)

    This is taxable Australian real property, an indirect Australian real property interest, or an option or right to acquire such property or such an interest.

    Relevant foreign resident vendors (also referred to as ‘vendors that the law applies to’ in this guide)

    The vendor is a relevant foreign resident if one or more of these scenarios apply:

    • The purchaser knows the vendor is a foreign resident.
    • The purchaser reasonably believes the vendor is a foreign resident.
    • The purchaser does not reasonably believe the vendor is an Australian resident, and either:    
      • the vendor has an address outside Australia (according to any record that is in the purchaser’s possession, or is kept or maintained on their behalf, about the transaction)
      • the vendor authorises provision of a related financial benefit to a place outside Australia (whether to the vendor or to anyone else).
    • The vendor has a connection outside Australia of a kind specified in the regulations.

    Principal asset test

    This is used to determine if an entity’s underlying value is principally derived from Australian real property.

    A membership interest in an entity passes the principal asset test if the sum of the market values of the entity’s assets that are taxable Australian real property exceeds the sum of the market values of the assets that are not.

    Taxable Australian real property

    This is real property situated in Australia (including a lease of land situated in Australia), or a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia.

    More information

    For more information and forms, visit ato.gov.au/FRCGW.

    Legislation and supporting materials

      Last modified: 11 Dec 2017QC 52808