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  • Foreign Investment Reforms working group minutes 26 October 2017

    Meeting details

    Venue: Teleconference

    Date: 26 October 2017

    Start: 15:00 Finish: 15:55

    Chair: Elizabeth Hardcastle

    Secretariat: Elizabeth Haydon

    Contact phone: (02) 4923 1569

    Attendees

    Chartered Accountants Australia and NZ

    Karen Smith

    KPMG

    Scott Farrell

    Institute of Conveyancers

    Rosemary Cotton

    Law Council of Australia

    Malcolm Brennan

    Property Council of Australia

    Belinda Ngo

    Ashurst

    Vivian Chang

    CPA Australia

    Gavan Ord

    Holding Redlich

    Vanya Lozzi

    Australian Financial Markets Association

    Dr Stephen Kirchner

    Treasury

    Amanda Ward

    Australian Taxation Office

    Kelly Canavan

    Laurence Scarborough

    Elizabeth Hardcastle

    Bernie Sabine

    Steve Eiser

    Karen Hyland

    Apologies

    Australian Bankers Association

    Tony Pearson

    Ian Gilbert

    Australian Financial Markets Association

    Robert Colquhoun

    BDO

    Lance Cunningham

    Chartered Accountants Australia and NZ

    Michael Croker

    Deloitte Lawyers Pty Ltd

    Luke Imbriano

    James Fabijancic

    Greenwoods & Herbert Smith Freehills

    Manuel Makas

    Holding Redlich

    Elly Ashley

    Law Council of Australia

    Malcolm Brennan

    John Farrell

    Real Estate Institute of Australia

    Jock Kreitals

    Tax Institute

    Jenny Wong

    Stevens Partners

    Jeff Stevens

    Trinity Law

    Michael James

    Treasury

    Adam McKissack

    Jared Henry

    Hunt and Hunt

    Murray McCutcheon

    Australian Taxation Office

    Leanne Campion

    Next Meeting

    TBA

    Action items

    • ATO will arrange a presenter from Smarter Data to provide high level detail about analytics / data matching
    • ATO will consider case studies and trends relating to residential applications that may be of interest to the working group.

    Agenda item 1: Welcome and introductions - Elizabeth Hardcastle

    • Elizabeth welcomed attendees, recapped that Ann Middleby had moved to another area within the ATO and that Elizabeth would be Chairing the Working Group from now on
    • The minutes of the previous meeting were accepted.

    Agenda item 2: Update from Treasury – Amanda Ward

    Vacancy Fee

    • The Treasury Laws Amendment (Housing Tax Integrity) Bill 2017 had passed the Lower House and debate in the Senate has been deferred until next sitting. If you would like further information on the Bill please consult the Explanatory Memorandum for the Bill at Treasury Laws Amendment (Housing Tax Integrity) Bill 2017External Link
    • The Regulation related to the Vacancy Fee is being prepared and it is expected to be finalised by late November 2017.
    • The exposure draft of the legislation establishing the Critical Infrastructure Centre has been publicised on 10 October 2017 and submissions close 10 November 2017 (please see https://www.ag.gov.au/Consultations/Pages/Security-of-Critical-Infrastructure-Bill.aspx)
    • Key components of the legislation are the establishment of the Register of Critical infrastructure and the ‘last resort’ power. (https://www.ag.gov.au/Consultations/Documents/critical-infrastructure-bill/CIC-factsheet-last-resort-power.pdf)

    Water Register

    • Registrations are continuing to come in prior to the closing of the stocktake period at 30 November 2017. The first report is expected mid next year at this stage.
    • More targeted communications are being considered by the ATO, Treasury and the Department of Agriculture and Water Resources to further enhance awareness.

    Agenda item 3: Capital Gains Withholding – Laurence Scarborough and Karen Hyland

    Foreign Resident Capital Gains Withholding tax (Laurence Scarborough)

    • Primary changes from the 2017 Budget are that the purchase threshold was lowered to $750,000 and the rate of withholding increased to 12.5%
    • Changes to the main residence CGT exemption were announced (Karen Hyland covered below)

    Communications

    • There have been website updates with the revised PDF documents:
      • Clearance certificate and variation
      • Purchaser payment notification – there has been a change to the question ‘Are you a foreign resident for Australian tax purposes’ to questions that the Tax Agents Board does not consider breaches the TASA (see more detail below)
       
    • Two ‘general content’ articles have been prepared which members are welcome to use in newsletters and other communications. The articles are attached to these minutes as Appendix A and Appendix B and may be used by participants.
    • Website changes are anticipated in the near future to ensure the formatting meets ATO requirements- actual content will not be altered in this process, just the formatting.

    Commissioner’s remedial power (CRP)

    • As telegraphed in the last meeting the ATO has lodged its first legislative instrument (LI) made under the CRP. This instrument is favourable for taxpayers and involves a foreign resident capital gains withholding (FRCGW) crediting misalignment issue where a property settlement straddles more than one income year. This will allow vendors to claim a FRCGW credit in the same year in which they have to declare the capital gain.

    Lodgement and Compliance

    • 75,031 clearance certificates have issued since the measure’s inception. There have been 35,473 issued since 1 July 2017
    • As previously advised the ATO are currently analysing breaches for the first year. Taxpayers are being contacted where a potential breach has been identified.

    Systems changes in September 2017

    • The Clearance Certificate application allows for the contract date to be entered. The certificate period now includes the date of contract (where available).
    • The Purchaser payment notification had the two questions changed to be compliant with the Tax Agents Services Act (TASA):

    ‘Are you a foreign resident for Australian tax purposes’ has been changed to ‘Has the vendor provided a clearance certificate or variation to nil from the Commissioner or a vendor declaration in relation to the asset?

    • Note that while the wording of the question changes, the manner the answer is recorded, processed and stored on the system does not.
    • We are working with PEXA to integrate the ATO system with electronic conveyancing options – now in June 2018 release.
    • There are several enhancements we are exploring:
      • Further help messages on the online applications
      • The purchaser payment notification form will only provide one PRN where there are multiple purchasers
      • Ways to reduce the inadvertent use of the clearance certificate PDF application
       
    • Any changes being considered will be discussed with industry for comment and feedback

    The Tax Practitioners Board

    • Sun-setting of the Regulations on 31 December 2017 for the measure has been avoided as the Tax Practitioners Board has provided their approval. The last point of concern was the payment notification – changes in wording of questions are acceptable and no longer are considered a breach of the TASA, therefore the sunset of the regulation of 31 December 2017 is no longer an issue
    • With regards to conveyancers obtaining a clearance certificate for clients the existing process of a conveyancer entering data from a completed form is acceptable. This can be continued indefinitely.
    • There is still work to be done to finalise a position with respect to what conveyancers can do within the limits of the TASA following industry feedback noting some State conveyancing legislation allows conveyancers to provide some ‘legal services’.

    Key messages and tips

    • Lodge early – remember we publicise a minimum 14 days turnaround for an online application that goes through automatically
    • Ensure the relevant tax return lodgements are up to date
    • Ensure a TFN/ABN is provided because it assists us to match the right client
    • Use the online form (i.e. don’t fax a paper form) as this will be processed much faster and provides a better client experience.

    PLEASE NOTE - there is an ATO Christmas closedown period over 23 December 2017 – 2 January 2018. No clearance certificates will be processed during that period. If you require a certificate for that period please lodge at least 14 days before 23 December 2017.

    Questions/Comments

    Q – What sort of volumes are you looking at for compliance matters and what are the outcomes?
    A – There have been several hundred compliance ‘please explain’ type approaches to taxpayers. There have been very few breaches.

    Capital gains tax changes for foreign residents (Karen Hyland)

    • In the 2017-18 Budget the Government announced it would deny foreign residents access to the CGT main residence exemption from 7:30PM (AEST) on 9 May 2017 (Budget night).
    • Existing properties held prior to this date will be grandfathered until 30 June 2019 meaning they can continue to claim the CGT main residence exemption for disposals that happen until then. This was announced as part of a package of measures to extend Australia's foreign resident capital gains tax (CGT) regime and reduce pressure on housing affordability.
    • By denying the CGT main residence exemption to foreign residents, they will need to declare any net capital gain in their tax return. They will also be subject to foreign resident capital gains withholding (if the contract price meets the relevant threshold), and they will no longer be entitled to the CGT main residence exemption as a reason for a variation to their withholding rate.
    • The Treasury Laws Amendment (Housing Tax Integrity) Bill 2017External Link exposure draft was released for consultation on 21 July 2017. Submissions closed on 15 August 2017. The proposal is still subject to Parliamentary processes before becoming law.
    • We intend to contact relevant member representatives over the coming weeks to discuss how best to communicate the changes with individual members once enacted.
    • If anyone has any particular questions or concerns you can contact Karen Hyland from the ATO via this working group. Steve Eiser from the ATO is assisting in the measure and will be running the communication aspects of the project.

    Agenda item 4: Foreign Investment Reforms – Vacancy Fee (ATO) - Bernie Sabine

    • An outline of high level design points for the ATO administration of the Vacancy Fee was presented. Key points are:
      • The information was provided on the understanding that the Vacancy Fee is yet to be pronounced law so there may be adjustments to the law to come.
      • The measure applies primarily to properties acquired as a result of FIRB applications lodged after 7.30pm 9 May 2017, and dwellings residentially occupied for less than 183 days per year.
      • The measure will affect an estimated 15,000 foreign persons annually who buy residential property.
      • Of those 15,000 around 20% (3,000) relate to established properties which carry strict occupation conditions.
      • A further 20% (3,000) are estimated to relate to development of property, where the vacancy fee rules will apply once a dwelling is completed or the first day the person has the right to occupy.
      • Foreign investors will have an obligation to lodge an annual Vacancy Fee return within 30 days after the end of each 12 month period following the settlement or completion of their residential dwelling.
      • Failure to lodge this return on time will allow the Commissioner to charge the Vacancy Fee regardless of whether the dwelling was residentially occupied or not, in addition to applying penalties that include infringement notices and imposing a civil penalty.
      • Broadly speaking the compliance approach will leverage the resources the ATO has with relation to data analysis and gathering that are utilised in administering the Foreign Acquisitions and Takeovers Act and related obligations.
      • Communication will also target the aligned professionals in property transfer markets – legal practitioners, conveyancers and agents, as well as our more traditional tax specific advisor network.
      • We will be utilising practises developed across the office that many in the group will be familiar with to engage and prompt compliance with obligations such as reminder emails etc.
       

    Questions/Comments

    Q – What are the amounts of the fees to be levied if someone is liable for the Vacancy Fee?

    A – The amount is based on the amount the foreign person would have paid for an application for approval to acquire the interest (property / dwelling). That is if the foreign person paid (or would have paid) $5,500 for their application then they would be charged a Vacancy Fee of $5,500 if they are liable for the fee.

    Q – Is there any breakdown of the number of residential applications registered over time such as month to month totals as well as over the last year?

    A – There does appear to be anecdotal evidence of a spike in applications approaching indexation (July 1).

    Q – Is there any further detail on compliance?

    A – Our approach to compliance is starting to reflect

    • A growing knowledge of the our market
    • The fact that the amendments have been in for what is approaching 2 years
    • More regular and timely data disclosures
    • Data disclosures that are becoming better in quality
    • Starting to identify and evaluate where behaviours are more serious and bringing our civil penalty order work on-line

    Comment – Knowledge of those serious behaviours and the ability for the ATO to detect contraventions of the law (including case studies) are useful to communicate to external parties to discourage non-compliance in CPD session and the like. Liz agreed and thanked participants for the continued support in fostering voluntary compliance. Liz also stated she would explore the inclusion of a Smarter Data representative to attend these meetings on occasion to provide context on our ‘big data’ approach.

    Agenda item 5: Update on communications – Abbey Wright

    • The main focus on communications for the ATO in this space presently is on the obligations relating to the Register of Water Entitlements as discussed above.
    • In relation to the Vacancy Fee we expect to follow our approach of social media and other articles, webinars and website updates etc.

    Agenda item 6: General Q&A

    No further questions were asked.

    Agenda item 7: Close

    There is no date specified for the next meeting. The next meeting date will be advised shortly.

    Attachment A

    Feature article – FRCGW

    Title: Buying or selling a property above $750,000? Australian resident sellers need a Clearance certificate from the ATO

    If you’re in the market for a property priced over $750,000 or you’re selling your property in that price range, then Australian resident sellers need a Clearance certificate from the ATO (even if you know them - such as a family member).

    The rules for foreign resident capital gains withholding (FRCGW) which have been in place since 1 July, 2016 require the purchaser to withhold a portion of the sale price of real property sold by foreign residents. The rules were designed to ensure foreign residents were meeting their tax obligations. Note: An Australian resident for tax purposes isn't the same as the definition of residency for immigration purposes, or for the Foreign Investment Review Board (FIRB) applications to buy Australian property.

    The FRCGW rule changes that came into effect from 1 July 2017 mean that more Australian residents are likely to be affected by these tax laws when selling property, and need to apply online for a clearance certificate from the Australian Taxation Office.

    The FRCGW rules now apply to all property contracts entered into on or after 1 July 2017:

    • for real property disposals where the contract price is $750,000 and above (previously $2 million)
    • the FRCGW withholding tax rate is now 12.5% (previously 10%).

    The previous threshold and rate will apply for any contracts that were entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017.

    You can learn more about the rules at www.ato.gov.au/FRCGW. We are closely reviewing applications by foreign resident taxpayers who have requested variations of the withholding amount to nil on the basis that they are disposing of their main residence. These applications will be subject to increased scrutiny, particularly where the applicant has never been an Australian resident for tax purposes.

    What the new rules mean for you

    If you are an Australian resident selling property with a market value of $750,000 or more, you need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from the proceeds of your sale. The key is to comply with the rules and prove you are not subject to the withholding tax.

    If you are buying property with a market value of $750,000 or more, you need to ensure the seller provides you with a clearance certificate (even if you already know they are an Australian resident). If the seller does not provide you with a valid clearance certificate by settlement, you must withhold 12.5% of the purchase price and pay this to the ATO.

    For the purchaser to rely on the clearance certificate, the ATO requires the following three conditions be met:

    • The name of the vendor on the certificate must match the name on the certificate of title (unless proof of name change is provided, for example a marriage certificate issued from an Australian state or territory registry).
    • The date the certificate is given to the purchaser must be a date that falls within the time period for which the clearance certificate is valid (this allows vendors to apply for clearance certificates after the date the transaction has been entered into).
    • The clearance certificate must be provided to the purchaser before settlement.

    You need to be careful because if you purchase a property where the seller does not provide a clearance certificate and you fail to withhold 12.5 per cent of the purchase price, you could be liable to pay that amount and additional penalties to the ATO. A $2100 penalty, as well as a further penalty equal to the amount of money that should have been withheld can apply to Australian resident purchasers as well as overseas purchasers.

    Clearance certificates

    • In the first year of operation of the FRCGW laws (1 July 2016 – 30 June 2017) just under 40,000 clearance certificates have been issued by the ATO.
    • Since the new changes came into effect (1 July – 31 August 2017) over 35,000 certificates have issued.

    To avoid any delays when applying for a clearance certificate, make sure you:

    • lodge your application early
    • have your tax return lodgements up to date
    • provide your TFN/ABN
    • use the online form.

    More information is available about clearance certificates on the ATO website.

      Last modified: 27 Nov 2017QC 53962