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  • Calculating the withholding

    Purchase price vs market value

    With taxable Australian real property, the market value determines whether this withholding measure needs to be considered.

    In most cases, the market value of a property should be the same as 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.

    However, there could be circumstances where the market value is different to the stated purchase price (for example, where the vendor and purchaser are related parties and did not deal with each other at arm’s length). In such cases, we won't accept the purchase price as a proxy for market value and the purchaser will need to seek a separate expert evaluation.

    Purchase price vs first element of the cost base

    The legislation provides that the purchaser applies the 12.5% withholding rate to the first element of the cost base of the asset the vendor is disposing of.

    The first element of the cost base is a tax technical term, which is the money paid, or required to be paid, to acquire the asset and the market value of any property given, or required to be given, in respect of acquiring the asset.

    In most cases, the first element of the cost base should be equivalent to 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 the first element of the cost base.

    Where a sales contract contains assets both subject to this withholding measure and not subject to this withholding measure, the purchaser and vendor can decide to come to an agreement as to what are the respective market values of each asset, in determining whether withholding should be imposed upon that share of the purchase price for each asset. Where the parties to the contract are not dealing at arm's length an independent valuer may need to be included in the valuation process.

    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, therefore each property needs to be assessed separately for withholding

    No additional payment on top of the agreed purchase price

    The obligation for the purchaser to withhold an amount and pay it to us isn't an additional payment on top of the agreed purchase price.

    The withholding amount is taken from the purchase price the purchaser has agreed to pay the vendor.

    How withholding applies to deposits or instalments

    Withholding is not required from deposits paid on signing of the contract.

    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.

    When 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 vendor has not received the agreed purchase price for the asset.

    Multiple purchasers (the ATO online form will help in this calculation)

    Where there are multiple purchasers, each purchaser doesn't 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

    You are purchasing a commercial property jointly with another entity. Your share of the acquisition is 40%, for which you are paying $400,000. This means the total property purchase price would be $1 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.

    Each purchaser will receive a different payment reference number, and a specified amount / rate to be paid via the online form. You may provide one cheque together with the details on how to apportion this amount.

    End of example

    Multiple vendors (the ATO online form will help in this calculation)

    If there are multiple vendors disposing of the asset, it's the total market value of the asset that determines whether withholding is required by the purchaser.

    If the purchaser hasn't 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 there are multiple Australian vendors disposing of the asset, each vendor should provide the purchaser with a separate clearance certificate which is to be in their name only.

    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 attributable to the relevant foreign resident vendor’s interest in the asset.

    We recognise in this situation, any vendors subject to the withholding would apply for a variation to ensure 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, 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.

    See also:

    The following examples are from the perspective of a purchaser determining their obligation to withhold. In all instances, it's assumed the purchase price is $750,000 or more.

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

    The purchaser has to withhold as there is a foreign resident. The withholding is based on the full purchase price of the property. The purchaser would need to see the clearance certificate from the Australian resident vendor. Otherwise, they would have to withhold on their interest within the property they are disposing of.

    If a clearance certificate is provided before settlement, then the purchaser doesn't have to withhold. The withholding would be on the full purchase price of the property – but we allow the withholding to be calculated only on the foreign resident’s interest in the property.

    End of example

     

    Example: Foreign resident vendor provides a variation

    The circumstances are identical, but now the foreign resident vendor shows a variation notice and the Australian vendor provides a clearance certificate. There is no withholding on the Australian resident’s interest in the property. There is withholding on the foreign resident’s interest in the purchase price of the property – but the rate of withholding is the withholding rate as specified on the variation notice issued by us to the foreign resident vendor, not 12.5%.

    End of example

     

    Example: Multiple foreign resident vendors

    As the property is being sold by foreign residents, the purchaser knows they must withhold. They have not received a clearance certificate, so must assume all the vendors are foreign residents.

    With respect to each foreign resident vendor, the amount of withholding is based on their specific interest in the property – their share of the purchase price.

    The purchaser must consider if any of these vendors has supplied a variation notice. If no variation notice is received, the withholding is 12.5% of the contract purchase price, with each vendor being subject to an amount reflective of their interest in the property being sold.

    If variation notices are provided by some or all of the foreign resident vendors, the purchaser must calculate the specific withholding rate applicable to each vendor.

    For vendors that don't supply a variation notice, the withholding is 12.5% of their share of the contract purchase price, reflective of their interest in the property being sold.

    For vendors that supply a variation notice, the rate of withholding applicable to their specific interest in the purchase price of the property will be the withholding rate as specified on the variation notice issued by us to that particular foreign resident vendor. It may be the purchaser has to withhold 8% from one vendor, and 3% from another vendor.

    End of example

    When the purchaser fails to withhold

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

      Last modified: 07 Nov 2019QC 48972