• Foreign resident capital gains withholding – common questions

    The following information explains the operation of the new withholding tax regime.

    We suggest you read it with Foreign resident capital gains withholding.

    The withholding obligation

    When do the rules apply?

    The rules apply when:

    • 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, and
    • 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.

    When is a vendor a relevant foreign resident?

    A vendor is a relevant foreign resident for the purposes of the withholding obligation if either:

    • the purchaser knows or has reasonable grounds to believe the vendor is a foreign resident
    • the purchaser doesn't reasonably believe the vendor is an Australian resident and    
      • has a record about the purchase indicating that the vendor has an address outside Australia, or
      • is authorised to provide a financial benefit (eg make a payment) to a place outside Australia (whether to the vendor or to anybody else).

    A vendor who sells the following assets with a market value of $2 million or more is also treated as a relevant foreign resident, even if they are an Australian resident for other tax purposes:

    • real property situated in Australia (including a lease of such land)
    • mining, quarrying or prospecting rights in relation to minerals, petroleum or quarry materials situated in Australia (to the extent those rights are not real property)
    • shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, an indirect Australian real property interest giving rise to a company title interest in land).

    A vendor who sells these assets is not treated as a relevant foreign resident if they have obtained a valid clearance certificate from us and given the clearance certificate to the purchaser before settlement.

    A vendor who sells any other type of asset to which this withholding tax applies is not a relevant foreign resident if they have given a valid declaration to the purchaser and the purchaser doesn't know the declaration to be false.

    When will a purchaser know or have reasonable grounds to believe the vendor is a foreign resident, or the vendor is not an Australian resident?

    The knowledge condition is only relevant to purchases of indirect Australian real property interests (other than company title interests) and options and rights to acquire taxable Australian real property or indirect Australian real property interests.

    The knowledge condition will be satisfied where the purchaser either:

    • has specific knowledge that a vendor is a foreign resident – such as where the vendor discloses that they are a foreign resident for tax purposes
    • reasonably believes the vendor is a foreign resident. This may occur, eg where the purchaser learns the vendor is living overseas. This is an objective test, meaning that, if a reasonable person in the position of the purchaser would have thought that there were reasonable grounds to support the belief, the purchaser is taken to have reasonably held that belief
    • doesn't reasonably believe the vendor is an Australian resident, provided the purchaser also has a record about the purchase indicating the vendor has an address outside Australia, or is authorised to provide a financial benefit (eg make a payment) to a place outside Australia. Again, specific knowledge by the purchaser is required, or a reasonable belief based on an objective analysis.

    Purchasers who are not comfortable determining whether the knowledge condition is satisfied, may seek a vendor declaration confirming the vendor is not a relevant foreign resident. A failure by the vendor to provide the declaration in these circumstances can be taken by the purchaser as confirmation that the vendor is a relevant foreign resident.

    What types of Australian property this withholding tax applies to?

    The withholding obligation applies to purchases of:

    • taxable Australian real property, including      
      • real property situated in Australia
      • a lease of land in Australia if a lease premium has been paid for the grant of the lease
      • a mining, quarrying or prospecting right (not being real property), if the minerals, petroleum or quarry materials are situated in Australia, including      
        • an authority, licence, permit or right under an Australian law to mine, quarry or prospect for minerals, petroleum or quarry materials
        • a lease of land in Australia that allows the lessee to mine, quarry or prospect for minerals, petroleum or quarry materials on the land, if a lease premium has been paid for the grant of the lease or
        • an interest in such an authority, licence, permit, right or lease
    • an indirect Australian real property interest (that is, a membership interest of 10% or more in an entity whose underlying value is principally derived from Australian real property). This includes shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest in real property)
    • an option or right to acquire any type of property or interest listed above.

    What does ‘petroleum’ include?

    Petroleum means any of the following naturally occurring substances:

    • hydrocarbon or mixture (or mixtures) of hydrocarbons (gas, liquid or solid), or
    • any mixture of such hydrocarbons and one or more of      
      • hydrogen sulphide
      • nitrogen
      • helium
      • carbon dioxide.

    Does the withholding tax apply to share issuances?

    The withholding obligation doesn't apply if the purchaser acquires shares as a result of being issued or allotted those shares because the shares will not be indirect Australian real property interests.

    For the withholding obligation to apply, all the necessary conditions in the law must be met at the time the transaction is entered into.

    An indirect Australian real property interest is a membership interest (eg a share) held by one entity in another entity if certain additional conditions are met. At the time the share issue transaction is entered into, the shares are not membership interests that the issuing company holds in another entity (they are membership interests in the issuing company itself), and therefore cannot be indirect Australian real property interests.

    Does the withholding tax apply to intra-consolidated group transactions?

    Yes. A member of a consolidated group that purchases from another member of the consolidated group an asset to which the withholding applies, is still required to comply with the withholding obligation.

    In practice, a clearance certificate can be applied for and issued to either:

    • the head company (an attachment can list all members of the consolidated group to which it can apply)
    • the member of the consolidated group on the title of the property.

    Does the withholding tax apply to transactions involving members of consolidated groups and third parties?

    Yes. A member of a consolidated group that purchases an asset to which the withholding applies from a third party is required to comply with the withholding obligation.

    Exceptions

    What are the exceptions?

    The purchaser is not required to withhold an amount under these rules if any of the following apply:

    • The CGT asset is taxable Australian real property or an indirect Australian real property interest giving rise to a company title interest – the market value of the property or interest is less than $2 million.
    • The CGT asset is taxable Australian real property or an indirect Australian real property interest that gives rise to a company title interest – the vendor provides the purchaser with a clearance certificate that they have obtained from us.
    • The CGT asset is a membership interest in an entity – the vendor provides the purchaser with a written declaration stating that the membership interest is not an indirect Australian real property interest, and the purchaser doesn't know the declaration to be false.
    • The CGT asset is another type of asset to which the withholding tax applies – the vendor provides the purchaser with a written declaration stating that they are an Australian resident, and the purchaser doesn't know the declaration to be false.
    • The transaction is on an approved stock exchange.
    • The transaction is conducted using a broker-operated crossing system, such as a ‘dark pool’, as described in the ASIC Market Integrity Rules (ASX Market) 2010.
    • Another withholding obligation already exists in respect of the transaction.
    • The transaction constitutes a securities lending arrangement for which a CGT rollover is available.
    • The transaction arises from the administration of a bankrupt estate or insolvency.

    Market value

    How is the market value of the asset determined?

    Generally 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 as part of a competitive bargaining process, 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 (eg where the vendor and purchaser are related parties and did not deal with each other at arm’s length). In such cases, we will not accept the purchase price as a proxy for market value and the purchaser will need to seek a separate expert evaluation.

    Note: If 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 (eg council rates, water and sewer charges and strata levies). Therefore, the $2 million threshold test is applied to the purchase price before adjustment for disbursements.

    What happens when selling property with multiple titles?

    Each parcel of real property sold is subject to a separate title. Therefore each is considered a separate CGT asset. For example, Bob owns a small farm which consists of three separately titled blocks, each valued at $1.7 million by an independent valuer, but they not able to be sold separately under the farm's land planning permit. As a separate asset, all three titles would come within the exclusion of subsection 14-215(1) as each has a market value less than $2m. This is the case regardless of whether there are one or multiple contracts involved for the sale of the three titles.

    Any restrictions imposed by planning permits or the titles do not change the fact that each parcel of real property is on a separate title, hence recognised as a separate asset. When sold (together) the purchaser is still acquiring multiple assets.  As such, all three would come within the exclusion of subsection 14-215(1) as each has a market value less than $2 million. Although the assets are legally required to be dealt with together under the planning permit, each title would be a separate CGT asset (similar to the situation with stapled securities) and the purchase price would need to be apportioned between them.

    What is the effect of GST on market value?

    If the purchaser is registered for GST and the supply of the asset is a taxable supply, the market value of the property is reduced by any input tax credit the purchaser is entitled to, based on the assumption that the acquisition is solely for a creditable purpose. Broadly, you acquire a thing for a creditable purpose to the extent that you acquire it in carrying on an enterprise. Where the purchaser is registered for GST and the transaction is a taxable supply, the GST inclusive purchase price less the input tax credit may be used as a proxy for market value.

    If the purchaser is not registered for GST or the supply of the asset is not a taxable supply (for example, because the vendor is not registered for GST or the supply is input taxed), or the purchaser is not entitled to any input tax credit, the GST inclusive purchase price may be used as a proxy for market value.

    Note:

    • The purchase price cannot be used as a proxy for market value if the parties have not dealt with each other at arm’s length.
    • The sale of real property that is 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 can (similar to a non-registered purchaser) use the GST inclusive price as a proxy for market value.

    Does the $2 million threshold apply to the assignment of a lease?

    The purchaser is required to withhold and pay to us 10% of the first element of the CGT asset's cost base.

    The obligation to withhold will only arise if a lease premium is paid for the grant of a lease, as the premium forms part of the first element of the cost base. Even where a premium is paid, withholding is only required if the market value of the lease is $2 million or more.

    Rent payable under the terms of the lease doesn't form part of the first element of the cost base, so the acquisition of a lease that doesn't include the payment of a premium will not give rise to a withholding liability.

    Any assignment of a lease that doesn't involve the payment of a premium will not give rise to a withholding liability.

    Do earnout rights affect the market value of the underlying asset?

    No. An earnout arrangement may be entered into at the time of sale of an asset where the vendor and purchaser do not agree on a fixed purchase price. However, the market value of an asset is not affected by the existence of an earnout right that is created at the time of the asset’s sale.

    Where the sale involves an earnout arrangement, can the purchaser use the upfront payment as a proxy for market value?

    No. Where the sale involves an earnout arrangement, the purchaser cannot use the upfront payment as a proxy for the market value of the asset. Purchasers will need to ascertain the market value of the asset on a different basis – such as seeking independent expert valuation.

    How do the rules apply when the transaction involves an earnout right?

    How the rules apply will depend on whether the earnout right is one of the following.

    'Look-through’ standard earnout rights

    The purchaser is required to withhold and pay to the Commissioner 10% of the first element of the CGT asset’s cost base just after the acquisition. The first element of the CGT asset’s cost base doesn't include any financial benefit the purchaser provides under a look-through standard earnout right relating to the CGT asset.

    The purchaser is also required to withhold and pay to the Commissioner 10% of the market value of the financial benefits provided by the purchaser under the earnout right, unless the entity receiving the financial benefit is not a relevant foreign resident at the time the financial benefit is provided.

    Non ‘look-through’ standard earnout right

    The purchaser is required to withhold and pay to the Commissioner 10% of the first element of the CGT asset’s cost base. The non-look-through earnout right is property given by the purchaser in respect of acquiring the CGT asset. Therefore, the first element of the CGT asset’s cost base includes the market value of the earnout right. The purchaser must ascertain the market value of the earnout right at the time of acquisition and include that value in calculating the 10% withholding.

    The purchaser is not required to withhold 10% of the market value of any financial benefits provided by the purchaser under the non-look-through earnout right.

    ‘Look-through’ reverse earnout right

    The purchaser is required to withhold and pay to the Commissioner 10% of the first element of the CGT asset’s cost base just after the acquisition. The first element of the CGT asset’s cost base is not reduced by the amount of any financial benefit that you receive under a look-through earnout right relating to the CGT asset.

    Non ‘look-through’ reverse earnout right

    The purchaser is required to withhold and pay to the Commissioner 10% of the first element of the CGT asset’s cost base. However, the purchaser has acquired more than one asset. The non-look-through earnout right is a separate CGT asset acquired by the purchaser and not subject to the withholding. Therefore, the first element of the cost base of the CGT asset that is subject to withholding is the amount of the purchase price that is reasonably attributable to that CGT asset.

    Clearance certificates

    When would a clearance certificate be obtained?

    In order to avoid an amount being withheld and paid to us by the purchaser, an Australian resident vendor can obtain a clearance certificate from us when the asset being disposed of is any of the following:

    • real property situated in Australia (including a lease of land situated in Australia)
    • a mining, quarrying or prospecting right (not being real property) if the minerals, petroleum or quarry materials are situated in Australia
    • shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest).

    We will issue a certificate where we have no reason to believe that the vendor is or will be a foreign resident during the period specified in the certificate.

    It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement. To avoid unanticipated delays, and to ensure the certificate is valid at the time it is given to the purchaser, vendors seeking a clearance certificate should apply through the online form as early as practical in the sale process. Without being presented with a valid clearance certificate, the purchaser will be required to remit 10% of the purchase price to us if no other exclusions apply.

    What name should be on the clearance certificate?

    The name on the clearance certificate must match the name on the Certificate of Title. The vendor should be the name of the entity that has legal title to the asset. The purchaser doesn't have to accept the clearance certificate if there is a discrepancy.

    If a vendor has changed their name since acquiring the property so that the vendor's current legal name doesn't match the name on the Certificate of Title, the vendor must provide evidence of the change of name (as examples, a change of name certificate or marriage certificate). We will issue the clearance certificate in the name that matches the Certificate of Title.

    What happens if the ATO withdraws a clearance certificate once it has been issued?

    We may withdraw a clearance certificate at any time if we obtain further information indicating that the vendor is a foreign resident. This is to ensure that the vendor is not able to use the clearance certificate where we determine they have no entitlement to it. We would expect that the withdrawal of a clearance certificate, once issued, would only occur in very rare situations given the checks and processes that have been put in place when issuing clearance certificates.

    Where a purchaser has, in good faith, not withheld from the purchase price on the basis of being provided with a clearance certificate prior to settlement, the purchaser will have met their obligations under the withholding rules. Any subsequent decision by us to withdraw the clearance certificate from the vendor doesn't alter the fact that the purchaser had correctly complied with the withholding provisions at the time of settlement. The purchaser will not be subject to any interest or penalty for failure to withhold in these circumstances, as at no stage was the purchaser required to withhold, given the vendor had produced a clearance certificate prior to settlement.

    What happens if the vendor provides a fraudulent clearance certificate?

    If a purchaser receives a document that appears to be a genuine and valid clearance certificate, and in good faith relies on that document to not withhold, we will not pursue the purchaser for the withholding.

    If the document is subsequently found to be fraudulent, we will hold the vendor liable for making a false and misleading statement and may prosecute them.

    Declarations

    Does the vendor declaration have to be in a specified form?

    There is no specific form in which the vendor should make the declaration, but a template that can be used for this purpose is available from this website.

    The contents of the declaration must not, to the best knowledge of the vendor, be false or misleading.

    The declaration may be inserted into a sale agreement as a standard clause contractual warranty.

    Paying the ATO

    How much does the purchaser have to pay to the ATO?

    A purchaser must pay us an amount equal to 10% of the total consideration given to acquire the CGT asset – that 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 (worked out at the time of the acquisition). This is known as the first element of the CGT asset’s cost base and is generally equal to the purchase price.

    Note: The first element of cost base doesn't include any disbursements at settlement (for example, for council rates, water and sewer charges and strata levies). Therefore, the withholding amount is 10% of the purchase price before adjustment for disbursements.

    In certain cases, the 10% withholding may need to be applied to an amount other than the actual consideration given to acquire the CGT asset. For example, in circumstances where the purchaser provides no consideration to acquire the asset, or where the purchaser and vendor are not dealing with each other at arm’s length, the amount to be withheld must be calculated based on the market value of the CGT asset.

    If the acquisition of the CGT asset is the result of exercising an option, modified rules apply.

    If the CGT asset is a lease, the withholding obligation only arises in respect of lease premiums paid for the grant of the lease, as these form part of the first element of the CGT asset’s cost base. Rent payable under the lease doesn't form part of the first element of the CGT asset’s cost base and is not subject to the 10% withholding rate.

    If we have granted a variation request, the varied amount is payable by the purchaser to us.

    How does subsection 14-200(4) apply?

    The intent of subsection 14-200(4) is to eliminate an unnecessary compliance burden on the purchaser that would have to otherwise complete a purchaser payment notification form in circumstances when there is actually no withholding amount to be paid to the Commissioner, for example, where a variation certificate approving nil withholding has been provided.

    Options

    What special rules apply for CGT assets that are options or acquired as the result of exercising an option?

    An option to acquire a type of CGT asset to which this withholding tax applies is itself a CGT asset to which this withholding tax applies. The purchaser will therefore be required to remit 10% of the first element of the cost base of the option (usually the option price or option premium) to us, unless the vendor provides the purchaser with a valid declaration or another exception or exclusion applies.

    Where a purchaser later acquires the CGT asset as a result of exercising the option, the amount to be paid to us is equal to 10% of the total consideration given to acquire the CGT asset less any payments the purchaser made, and the market value of any property they gave, for the option (or to renew or extend the option). These rules ensure that the purchase price of the option is not counted twice in determining the amount to be withheld.

    What if an option contract is entered before 1 July 2016 but exercised after that date?

    When the option was granted has no bearing on the foreign resident capital gains withholding implications. It is the time of exercise of the option that is the relevant point at which the grantee must consider whether the foreign resident capital gains withholding provisions apply to the amount they are paying the grantor.

    Where the option is exercised on or after 1 July 2016 and the asset being acquired is a relevant asset (ie taxable Australian real property or an indirect Australian real property interest), then the withholding provisions do apply to the ‘first element of the cost base’ of that relevant asset (the ATO accepts this is the purchase price of the asset where there is an arm’s length transaction). This is the case even when the option was granted prior to 1 July 2016 or where the option contract doesn't consider foreign resident capital gains withholding.

    If the grantor of the option wishes to prevent the grantee from applying the withholding at the time of the exercise of the option, then the grantor has a number of alternatives that they can undertake prior to the date that the grantee exercises the option:

    • The grantor could apply to the ATO for a clearance certificate on the basis that they are an Australian resident for tax purposes, and provide a copy to the grantee prior to the grantee exercising the option.
    • The grantor could supply a vendor declaration to the grantee, prior to the grantee exercising the option that confirms that they are an Australian resident for tax purposes or that the membership interest is not an indirect Australian real property interest – assuming that the asset being disposed of is not taxable Australian real property.
    • If the grantor cannot provide a clearance certificate or a vendor declaration to the grantee, they could apply to the ATO for a variation of the withholding rate from 10% down to a rate that they consider reflects their tax liability on the disposal of that asset. They would then provide a copy of this approved variation to the grantee prior to the grantee exercising the option.

    If the grantor is not able to utilise any of the above alternatives then the grantee will have to withhold the 10% foreign resident capital gains withholding at the time the grantee acquires the asset as a result of exercising the option.

    A purchaser that withheld in accordance with their Federal income tax obligations would be protected by sub-section 16-20(2) of Schedule 1 to the TAA. This provides that a purchaser's liability to pay the purchase price is reduced by the withholding amount paid to the Commissioner.

    Non-compliance

    What penalties apply if the purchaser fails to withhold an amount from the purchase price?

    A purchaser that fails to withhold an amount required to be withheld from the purchase price must pay us a penalty equal to the amount they failed to withhold. We are obliged to give written notice to the purchaser of their liability to pay the penalty and the reasons for imposing the penalty.

    The purchaser will also be subject to the general interest charge on any amounts not paid to us by the required date.

    Variations

    Foreign residents and the main residence exemption

    While it is not a condition of the main residence exemption that the taxpayer is an Australian resident for tax purposes, an individual who is a foreign resident is unlikely to have a durable connection with Australia, or would lack the intention to make Australia their home. The facts and circumstances that would lead to the conclusion that a taxpayer was a foreign resident because they did not reside in Australia, or were not domiciled in Australia, would tend to preclude the finding that the individual had a main residence (that is, a dwelling they used as their home or principal place of residence) in Australia.

    Different considerations would apply if the individual was formerly an Australian resident who was seeking to claim the main residence exemption by relying on section 118-145 of the Income Tax Assessment Act 1997 (ITAA 1997), which extends the main residence exemption during an absence, for example, because they had left Australia to live overseas. While this fact pattern does not raise the same concerns as the circumstances set out above, the Commissioner would still need to be satisfied that the real property in Australia was, and continues to be, the taxpayer’s main residence when considering any request to vary the withholding amount.

    How do variation and price fluctuations apply?

    If the indirect interest in taxable Australian real property is in a wholesale trust that has unit values that fluctuate daily, then there is a risk that the variation would become invalid as the unit selling price exceeds the unit price specified in the conditions of the variation notice we issued.

    As a solution to this potential problem, the variation condition we provided on the variation notice can provide a number of alternative prices, with a differing variation rate applying to each. If you are in this situation you should provide information in relation to possible price differences and what you believe would be an appropriate variation rate within that price range – this information can be supplied in the attachment to the variation application.  

    Deceased estates

    What happens on an individual's death?

    Upon the death of an individual, there may be relevant assets that come within this measure. As a result of the death of an individual any of the following may occur:

    • a beneficiary acquires ownership of the relevant asset under the deceased individual’s will, by operation of an intestacy law etc
    • a beneficiary acquires ownership of the relevant asset from the legal personal representative (executor/trustee) of the deceased individual in a manner not described above
    • the property devolves to the legal personal representative (executor/trustee) following the death of the individual
    • a surviving joint tenant acquires the deceased joint tenant’s interest in a CGT asset.

    We have set out in a legislative instrument that no withholding is required in the above circumstances. Refer to the Federal Registrar of Legislation's page PAYG Withholding variation for foreign resident capital gains withholding payments – deceased estates and legal personal representativesExternal Link. The operation of the Instrument will extend to circumstances where assets pass to beneficiaries of a testamentary trust.

    Any other transfer or disposal of the relevant asset by the legal personal representative will create a withholding obligation. For example, the legal personal representative (executor/trustee) may decide to transfer or dispose of the relevant assets to a third party.

    Situations involving mortgagors and mortgagees

    What happens with mortgagors and mortgagees?

    This concerns situations where a mortgagor (borrower) has borrowed funds from a mortgagee (creditor, for example a bank), that mortgagor is in unable to repay the loan and the mortgagee requires them to sell the secured asset which is subject to foreign resident capital gains withholding (referred to as property in this section).

    There are three situations this commonly applies:

    • Situation 1 – the mortgagor retains title to the sale as the mortgagee has not repossessed the title to the property but has ordered its sale.
    • Situation 2 -–where the mortgagee does take possession of the property and sells in that capacity, but there is no transfer of title from mortgagor to mortgagee.
    • Situation 3 – the mortgagee has repossessed and taken title to the property from the mortgagor. This is commonly known as a foreclosure. Note in this situation there are two transactions where foreign resident capital gains withholding may apply
      • the transaction concerning the transfer of title from the mortgagor to the mortgagee (generally deemed to be a sale of the property at market value)
      • the transaction concerning the transfer of title from the mortgagee to the ultimate purchaser.

    Where the mortgagee does not become the owner of the property as a result of repossessing it, the property is not being acquired from the mortgagee, but from the company (even though the contract may show the mortgagee in possession as the vendor). If the company is under administration or otherwise meets a condition of paragraph 161A(1)(a) of the Corporations Act 2001, then the exclusion from withholding provided by paragraph 14-215(1)(f) of the Taxation Administration Act 1953 (TAA 1953) applies to this sale by the mortgagee. Although there is no need to provide a clearance certificate to the purchaser in this instance, the purchaser may want to see evidence from the company or mortgagee that the exclusion applies to support their decision not to withhold.

    Clearance certificates and vendor variations – who should apply?

    The entity with the title to the property is required to obtain the clearance certificate so foreign resident capital gains withholding won't apply.

    In Situation 1, the mortgagor remains the legal owner of the property. Therefore it is the mortgagor who has to obtain the clearance certificate (and ensure it is given to the ultimate purchaser for foreign resident capital gains withholding not to apply). In the event the mortgagor doesn't co-operate with the mortgagee, then the mortgagee, as a creditor, can apply for a foreign resident capital gains variation to have the withholding reduced to the extent that the amount it is owed would not be covered by the sale proceeds if an amount was withheld.

    In Situation 2, the mortgagee cannot obtain a clearance certificate as they are not the legal owner of the property. However, the mortgagee can apply for a foreign resident capital gains variation to have the withholding reduced to the extent that the amount it is owed would not be covered by the sale proceeds if an amount was withheld.

    There is no specific requirement as to who physically gives the clearance certificate to the purchaser. Therefore, with both situation 1 and 2, if the mortgagor, as vendor, obtained the clearance certificate, then gave it to the mortgagee, and the mortgagee gave it to the purchaser then that is fine. This is because the ultimate purchaser can verify that the clearance certificate issued to the vendor matches the name on the certificate of title.

    In Situation 3, for foreign resident capital gains withholding not to apply, clearance certificates are required to be given to the 'purchasers' for both transactions, that is:

    • repossession by the mortgagee from the mortgagor. For the purposes of this transaction the mortgagor, as the vendor, is the party that has title of the property that would obtain the clearance certificate. As in situation 1, if the mortgagor doesn't co-operate in this regard, the mortgagee, as a creditor, can apply for a foreign resident capital gains variation
    • sale of the property by the mortgagee to the ultimate purchaser – as the mortgagee has title to the property it is mortgagee that would obtain the clearance certificate.

    What about withholding an amount of foreign resident capital gains withholding?

    For the purpose of this part it is assumed that the entities taken to be the vendors are not entitled to a clearance certificate and that therefore foreign resident capital gains withholding applies.

    In Situation 1, the mortgagor remains the legal owner of the property. Therefore if the mortgagor doesn't have a clearance certificate, the mortgagee is required to withhold the 10% foreign resident capital gains withholding. If either the mortgagor, as vendor, or the mortgagee, as creditor, have applied and been granted a foreign resident capital gains withholding variation, the reduced rate of withholding specified in the variation notice applies.

    In Situation 2, the purchaser of the property would need to withhold at the 10% rate unless the mortgagee has obtained a foreign resident capital gains variation to have the withholding reduced to the extent that the amount it is owed would not be covered by the sale proceeds if an amount was withheld. Where a variation has been obtained by the mortgagee, the purchaser withholds at the rate specified in the variation notice provided by the ATO to the mortgagee.

    For Situation 3, both transactions have to be considered:

    • repossession by the mortgagee from the mortgagor – foreign resident capital gains withholding applies to this transaction with the mortgagee (creditor) having to withhold the 10% foreign resident capital gains withholding unless either the mortgagor, as vendor, or the mortgagee, as creditor, have applied and been granted a foreign resident capital gains withholding variation.
    • sale of the property by the mortgagee to the ultimate purchaser – foreign resident capital gains withholding would apply. Therefore, unless the mortgagee has obtained a foreign resident capital gains withholding variation, the ultimate purchaser is required to withhold at a rate of 10%.

    Are there exceptions to the above?

    There may be a situation where the mortgagee’s name is not on the title as registered proprietor (although the mortgage will be listed as an interest on that title). This is because the mortgagee has not repossessed the property. However, the contract of sale will show the vendor as a 'mortgagee in possession exercising a power of sale under mortgage xyz'.

    With respect to paying the foreign resident capital gain's withholding, the name of the vendor on the purchaser payment notification form must be the mortgagor (borrower) as the mortgagee (creditor) has never taken title to the asset. This ensures that the foreign resident capital gains withholding credit that arises correctly goes to the borrower which is also the entity that is required to declare the capital gain.

    What if a company is insolvent or under external administration?

    If the entity from which the asset is acquired is a company that satisfies any of the conditions in paragraph 161A(1)(a) of the Corporations Act 2001 the transaction is excluded. The purchaser will not have a withholding obligation. This exclusion applies broadly, for example, it is not limited to transactions involving assets for which there is a receiver.

    Amendments

    How can a withholding payment be cancelled or amended if a clearance certificate or variation issues after the purchaser has submitted the purchaser payment notification?

    Phone us on 13 28 66 for referral to the relevant area who will try to help you resolve this situation.

    Credits

    Is the foreign resident vendor entitled to a credit for the withholding tax paid by the purchaser?

    Yes, contingent upon the purchaser paying the amount to us. We will notify the vendor to confirm a payment has been received.

    If the purchaser withholds an amount from the vendor but doesn't pay the withholding to us, the vendor is not entitled to a credit as no credit has arisen. The vendor is also not entitled to claim the non-payment of the withholding as a tax loss.

    In this case we will promptly take action to collect from the purchaser any withholding amount not paid by the due date.

    If the vendor is concerned the purchaser may not pay the withholding, the vendor should seek legal advice.

    How does the foreign resident vendor claim the credit?

    The vendor must lodge an income tax return in order to claim the credit. The entitlement to a credit arises when we make an income tax assessment (or determine that no income tax is payable) for the income year.

    If the foreign resident vendor has provided their TFN to the purchaser, we are notified of this when the purchaser lodges the purchaser payment notification. We can then more easily match the amount withheld to a specific vendor for the purposes of allowing the credit.

    Legislative instruments

    Law companion guides

    The following law companion guides provide additional guidance in relation to foreign resident capital gains withholding:

      Last modified: 28 Nov 2016QC 48985