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  • Capital gains withholding: Impacts on foreign and Australian residents

    The ATO will close its normal operations from close of business Friday 21 December 2018, with business resuming on the first working day after New Year’s Day 2019. No clearance certificates or variations will be processed during this period. If you require a certificate or variation for settlement during that period, please lodge your application at least 28 days before 21 December 2018.

    Foreign resident capital gains withholding (FRCGW) applies to vendors disposing of certain taxable property under contracts entered into from 1 July 2016.

    The FRCGW tax rate is 12.5%.

    It also now applies to real property disposals where the contract price is $750,000 or more.

    For contracts that are entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017, the FRCGW withholding tax rate is 10% and applies to real property disposals where the contract price is $2 million and above.

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    Background

    This existing withholding legislation assists the collection of foreign residents’ Australian tax liabilities.

    It imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay it to us, where a vendor enters into a contract on or after 1 July 2017 and disposes of certain asset types (or receives a lease premium for the grant of a lease over Australian real property).

    The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain (profit) from the disposal of the asset.

    A tax file number (TFN) is required to lodge a tax return; they will need to apply for a TFN if they don't have one. The vendor may claim a credit for any withholding amount paid to us in their tax return.

    Australian resident vendors can avoid the requirement of the purchaser to withhold the 12.5% by providing one of the following to the purchaser prior to settlement:  

    • for Australian real property, a clearance certificate obtained from us      
      • Australian resident vendors selling real property will need to obtain a clearance certificate from us prior to settlement, to ensure they don't incur the 12.5% non-final withholding
       
    • for other asset types, a vendor declaration    
      • the vendor may provide the purchaser with a vendor’s declaration to specify withholding isn't required on the acquisition of the asset.
       

    Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.

    Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.

    When the rules apply

    • An entity (the purchaser) becomes the owner of a capital gains tax (CGT) asset as a result of acquiring it from a vendor (or vendors) under one or more transactions.
    • At least one of those vendors is a relevant foreign resident at the time at least one of the transactions is entered into.
    • The CGT asset is a certain type of Australian property or an option or right to acquire such property.
    • The purchaser acquires the CGT asset under a contract entered into on or after 1 July 2016.
    • There are no exceptions.

    While the objective of the rules is to assist in the collection of foreign residents' CGT liabilities, the withholding tax will apply regardless of whether the vendor's gain on the sale of the asset is subject to tax under the CGT regime or as ordinary income.

    The withholding obligation applies to both Australian resident and foreign resident purchasers.

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      Last modified: 04 Dec 2018QC 48972