Explanatory Memorandum(Circulated by authority of the Treasurer, the Hon Scott Morrison MP)
Chapter 2 Foreign resident capital gains tax withholding regime
Outline of chapter
2.1 Schedule 2 to this Bill amends the Taxation Administration Act 1953 (TAA 1953) to introduce a new regime that imposes withholding obligations on the purchasers of certain Australian assets. The purpose of the regime is to assist in the collection of foreign residents' capital gains tax (CGT) liabilities.
Context of amendments
2.2 Foreign residents are subject to CGT on any capital gains they make from the disposal of certain Australian assets. Voluntary compliance with these requirements, however, is extremely low and compliance action, by the Australian Taxation Office, is difficult to undertake.
Taxation of foreign residents' capital gains
2.3 Australia's current foreign resident CGT regime was introduced in 2006, with the insertion of Division 855 into the Income Tax Assessment Act 1997 (ITAA 1997). Consistent with international practice and Australia's international tax treaties, this regime promotes foreign investment in Australia. Subdivision 855-A operates to disregard a capital gain or capital loss made by a foreign resident unless the relevant CGT asset is taxable Australian property. Broadly, this includes:
- a direct or indirect interest in taxable Australian real property (TARP);
- an asset used in carrying on a business through a permanent establishment in Australia; or
- rights and options with respect to these assets.
Taxable Australian real property
2.4 A CGT asset is TARP if, under section 855-20, it 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.
Indirect Australian real property interests
2.5 The objects of the foreign resident CGT regime (section 855-5) include ensuring that interests in an entity are subject to Australia's capital gains tax laws if the entity's underlying value is principally derived from Australian real property.
2.6 This is achieved by ensuring that a capital gain made by a foreign resident on an 'indirect Australian real property interest' cannot be disregarded (see section 855-25).
2.7 An 'indirect Australian real property interest' includes a non-portfolio interest (an interest of 10 per cent or more) in an entity whose underlying value is principally derived from Australian real property.
2.8 The Principal Asset Test in section 855-30 is used to determine whether an entity's underlying value is principally derived from Australian real property. The Principal Asset Test requires a comparison of the sum of the market values of the entity's TARP assets with the sum of the market values of its non-TARP assets. The Principal Asset Test is satisfied if the sum of the market values of the entity's assets that are TARP exceeds the sum of the market values of the assets that are non-TARP.
Compliance and collection
2.9 Foreign residents are required to lodge tax returns if they have derived Australian assessable income, including from a capital gain that is not disregarded under Division 855. Compliance with this obligation is very low in the case of foreign resident CGT liabilities. The Commissioner of Taxation (Commissioner) has a number of powers to assist in the collection of these liabilities; however, it can be difficult to apply these measures when funds from disposing of an asset have left the country, and there are no other assets in Australia to meet the tax liability.
2.10 Where the Commissioner is aware that a foreign resident has a tax liability, the Commissioner may be able to issue an income tax assessment. The ability of the Commissioner to enforce an assessment against a foreign resident, however, will depend on the circumstances, particularly whether the taxpayer is present in Australia or has other investments in Australia.
2.11 Where the taxpayer has other property in Australia, the Commissioner may seek a freezing order (Mareva injunction) against those assets, which can then be applied to the taxpayer's tax liability. Freezing orders can also extend to other parties in possession of or with the means of controlling the assets of the non-resident, or to assets which are in substance the assets of the non-resident albeit legally owned by another party. However, a foreign resident will often not have other Australian assets to satisfy a tax liability.
2.12 The Commissioner may also issue a notice under section 255 of the Income Tax Assessment Act 1936 (ITAA 1936) to a person that is in control of a non-resident's money, requiring that person to pay the non-resident's tax. However, this mechanism requires that an assessment be raised to crystallise a tax liability (which can be done on an ad hoc basis) and is only effective where the assessment is made and the notice is served while the third party still has present or prospective control over the non-resident's funds. The money can be passed onto the non-resident within days, limiting the Commissioner's ability to give practical effect to the notice before the funds flow out of Australia. The Commissioner is also unlikely to have immediate knowledge of the transaction.
2.13 Withholding taxes are amounts that a person (the payer) withholds from a payment they make to another person (the recipient). Withholding taxes represent the (sometimes estimated) tax liability of the recipient. Withheld amounts are paid to the Commissioner. There is currently no specific withholding regime for capital gains and related property transactions.
2.14 A withholding tax may be final or non-final:
- A final withholding tax represents the final tax liability for the person receiving the withholding payment. Final withholding tax regimes exist for many revenue payments (for example dividends, interest payments and royalties) made to foreign residents.
- 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. Pay as you go withholding from salary and wages is an example of a non-final withholding tax.
2.15 The amendments establish a non-final withholding regime.
2.16 The amendments impose an obligation on the payer to pay an amount to the Commissioner. The person subject to the obligation is entitled to withhold the amount from any payment to the person with the primary tax liability.
2.17 Division 13 in Schedule 1 to the Tax Administration Act 1953 (TAA 1953), which deals with the collection of tax with respect to alienated personal services income, is an example of this approach to withholding. Further examples are contained in Division 14, which imposes obligations with respect to the provision of non-cash benefits and certain accruing gains.
2.18 Mechanisms for the payment of withheld amounts to the Commissioner, including the creation of offences and the imposition of penalties, are contained in Division 16. Division 18 provides that recipients of a withholding payment are generally entitled to a credit for the amount withheld or a refund. Credits are applied to the recipient's income tax liability once they have lodged their income tax return.
Summary of new law
2.19 The amendments in Schedule 2 to the Bill impose a 10 per cent non-final withholding obligation on the purchasers of certain Australian assets where they acquire it from a relevant foreign resident.
2.20 The obligation does not require withholding as such, but does require the purchaser to pay 10 per cent of the first element of the cost base (usually, the purchase price) to the Commissioner. This amount may be withheld from the payment the purchaser makes to the vendor.
2.21 The obligation will apply to the acquisition of an asset that is:
- an indirect Australian real property interest; or
- an option or right to acquire such property or such an interest.
Summary of exemptions
2.22 To minimise the compliance costs that arise from these amendments, no obligation is imposed in any of the following situations:
- transactions involving TARP and certain indirect Australian real property interests, valued less than $2 million;
- a transaction that is conducted through a stock exchange or a crossing system;
- an arrangement that is already subject to an existing withholding obligation;
- a securities lending arrangement; or
- transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings.
2.23 In addition, no obligation is imposed in any of the following situations:
- in the case of TARP and certain indirect Australian real property interests, where the vendor obtains a clearance certificate from the Commissioner; or
- in the case of other types of property covered by the amendments:
- where the vendor has made a declaration that they are an Australian resident for income tax purposes; or
- where, if the CGT asset acquired is a membership interest, the vendor has made a declaration that the interest is not an indirect Australian real property interest.
2.24 The vendor declarations only exempt a specific vendor and withholding may still apply if the transaction involves multiple vendors.
Comparison of key features of new law and current law
|New law||Current law|
|A purchaser that acquires certain Australian assets from a vendor that is a relevant foreign resident must pay 10 per cent of the purchase price to the Commissioner. The purchaser may withhold this amount from the vendor.||No equivalent.|
Detailed explanation of new law
2.25 The withholding regime applies to purchasers that acquire certain taxable Australian property assets. When the purchaser acquires the asset, they must pay an amount, equal to 10 per cent of the first element of the cost base (usually, the total purchase price) to the Commissioner. The purchaser may withhold the amount from any amount owed to the vendor of the asset.
2.26 This differs from the majority of withholding rules in two respects.
2.27 Firstly, the obligation applies to, in effect, the total purchase price for the asset acquired, rather than to a specific payment. This prevents multiple withholding obligations arising in relation to a single transaction that is completed through instalments.
2.28 Although there is no obligation to withhold as such, the obligation to pay the amount to the Commissioner is still described as a withholding obligation because the payment amount may be withheld from the vendor.
2.29 Secondly, the obligation is imposed on the purchaser of the property. Other withholding regimes that operate on a flow of funds basis may impose withholding obligations on intermediaries. Intermediaries are not required to withhold under the amendments.
Conditions for the obligation
2.30 Purchasers are only required to pay an amount to the Commissioner when the following conditions are satisfied:
- the asset acquired is a relevant Australian asset [Schedule 2, item 1, paragraph 14-200(1)(c) in Schedule 1 to the TAA 1953];
- the acquisition is not an excluded transaction [Schedule 2, item 1, subsection 14-200(1) in Schedule 1 to the TAA 1953]; and
- any vendor of the property is a relevant foreign resident, and:
- where the asset is TARP or a certain type of indirect Australian real property interest, the vendor has not obtained a clearance certificate from the Commissioner [Schedule 2, item 1, paragraph 14-210(1)(e) and subsection 14-210(2) in Schedule 1 to the TAA 1953];
- in the case of other assets covered by the amendments, the purchaser has not received a declaration from the vendor that they are an Australian resident, and the purchaser satisfies the knowledge condition - that is the purchaser knows or has reason to believe the vendor is a foreign resident [Schedule 2, item 1, subsections 14-210(1) and 14-210(3) in Schedule 1 to the TAA 1953];or
- in the case where the asset is a membership interest, the vendor has not made a declaration that the membership interests are not indirect Australian real property interests [Schedule 2, item 1, subsection 14-225(2) in Schedule 1 to the TAA 1953].
2.31 The withholding obligation arises when a purchaser acquires an asset that is:
- an indirect Australian real property interest; or
- an option or right to acquire such property or such an interest.
[Schedule 2, item 1, paragraph 14-200(1)(c) in Schedule 1 to the TAA 1953]
2.32 These assets are detailed at paragraphs 2.4 to 2.8.
2.33 The amendments only apply to these assets. Other assets that are taxable Australian property are not subject to the amendments. For example, an asset, not being an asset listed in paragraph 2.31, that is used in carrying on a business through an Australian permanent establishment is not subject to the amendments.
2.34 The scope of the amendments reflects that the compliance burden of withholding in relation to these assets would be too high. In addition, foreign residents with a taxable presence in Australia represent a lower compliance risk.
2.35 Further assets and transactions are specifically excluded from the regime.
2.36 There are a number of transactions excluded from the scope of the withholding regime. A transaction that results in the acquisition of a CGT asset is excluded if any of the criteria in this section are met. This means that the purchaser acquiring the asset is not required to pay an amount to the Commissioner.
TARP less than $2 million
2.37 The amendments do not apply to TARP that has a market value of less than $2 million. [Schedule 2, item 1, subparagraph 14-215(1)(a)(i) in Schedule 1 to the TAA 1953]
2.38 The purpose of this exclusion is to minimise compliance costs, alleviating the need for purchasers to undertake the preliminary compliance obligation of determining the residency status of the vendor. This exclusion will ensure that the amendments are clearly inapplicable to most residential property sales. [Schedule 2, item 1, paragraph 14-215(1)(a) in Schedule 1 to the TAA 1953]
2.39 The exclusion applies to TARP, including residential premises, commercial property, vacant land, leasehold, easements, covenants, mortgages and stratum title schemes that have a value of less than $2 million. These will generally fall within the definition of TARP.
2.40 Where there are multiple purchasers, the de minimis threshold applies to the market value of the sum of all of the purchasers' interests. This ensures that joint purchasers cannot avoid the threshold. [Schedule 2, item 1, subsection 14-215(2)].
Company title interests
2.41 Under company title, entities own shares in a company that owns real property rather than any direct real property interest. The shares confer rights to occupy the real property to which the company has legal title. This is an indirect Australian real property interest.
2.42 Company title interests also fall within this exclusion if the value of the relevant interest is less than $2 million. [Schedule 2, item 1, subparagraph 14-215(1)(a)(ii)]
2.43 This will align the treatment for entities that own property through company title with the treatment for those that own property through strata title.
2.44 Other indirect real property interests do not fall within this exclusion.
Transactions on a stock exchange
2.45 The amendments do not apply to 'on-market transactions' that are conducted on an approved stock exchange. The nature of these transactions makes it impossible for a purchaser to determine the identity and residency status of their counterparty. [Schedule 2, item 1, paragraph 14-215(1)(b) in Schedule 1 to the TAA 1953]
2.46 'Approved stock exchange' is defined in subsection 995-1(1) of the ITAA 1997 and approved stock exchanges are listed in Schedule 5 to the Income Tax Assessment Regulations 1997. It is intended that these regulations would be updated to include Chi-X Australia Pty Ltd.
Transactions that are conducted on a broker-operated crossing system
2.47 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.
2.48 The amendments do not apply to transactions that are conducted using a broker-operated crossing system. Whether the transaction is effected on-market or on a crossing system is often outside of the vendor's control. As with transactions that occur on-market, it may not be possible for a purchaser to determine the identity and residency status of the counterparty. [Schedule 2, item 1, paragraph 14-215(1)(c) in Schedule 1 to the TAA 1953]
2.49 'Crossing system' is defined in rule 1.4.3 of the ASIC Market Integrity Rules (ASX Market) 2010.
Other withholding obligations
2.50 It is intended that the amendments apply as a withholding regime of last resort. As such, the amendments will not apply where another withholding obligation applies to the transaction. [Schedule 2, item 1, paragraph 14-215(1)(d) in Schedule 1 to the TAA 1953]
Securities lending arrangements
2.51 A securities lending arrangement is an arrangement under which 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.
2.52 Securities lending arrangements are eligible for roll-over relief under section 26BC of the ITAA 1936. As these arrangements will not trigger a CGT liability for the vendor, they are exempt from the withholding obligation. [Schedule 2, item 1, paragraph 14-215(1)(e) in Schedule 1 to the TAA 1953]
External administration and bankruptcy
2.53 Where the foreign resident is a company under external administration at the time of the transaction, the amendments will not apply. This will ensure that the withholding obligation does not disturb the priority of other creditors.
2.54 This exclusion will be satisfied if any of the conditions in paragraph 171A(1)(a) of the Corporations Act 2001 are satisfied, or if the company is in the same or a similar position under a foreign law. [Schedule 2, item 1, paragraph 14-215(1)(f) in Schedule 1 to the TAA 1953]
2.55 Where the foreign resident is an individual, the amendments will not apply where the transaction arises from the administration of a bankruptcy estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law. [Schedule 2, item 1, paragraph 14-215(1)(g) in Schedule 1 to the TAA 1953]
Relevant foreign resident vendors
2.56 The obligation to pay an amount to the Commissioner only arises if the vendor is a relevant foreign resident (which, where applicable, may include a resident if they have not obtained a clearance certificate from the Commissioner).
2.57 In the case where the CGT asset to which the transaction relates is TARP, or an indirect Australian real property company title interest, the entity will be treated as a relevant foreign resident unless a clearance certificate is obtained from the Commissioner certifying that the entity is not a relevant foreign resident for the purposes of these amendments. [Schedule 2, item 1, paragraph 14-210(1)(e) and subsection 14-210(2) in Schedule 1 to the TAA 1953]
2.58 For other assets captured by the amendments, whether the purchaser is dealing with a relevant foreign resident will depend on whether they have received one of two declarations (which the purchaser does not know to be false), or whether the purchaser has reasonable grounds to believe the vendor is a foreign resident (referred to as 'the knowledge condition'). [Schedule 2, item 1, paragraphs 14-200(1)(b), and subsections 14-210(1) and (3) in Schedule 1 to the TAA 1953]
2.59 If the purchaser acquires property from multiple vendors, the obligation to pay an amount may arise if any of the vendors is a relevant foreign resident.
The residency of the vendor
2.60 The definition, for tax purposes, of resident of Australia is contained in subsection 6(1) of the ITAA 1936. A foreign resident is a person other than a resident (subsection 995-1(1) of the ITAA 1997).
2.61 An individual (natural person) is generally an Australian resident if they reside here within the ordinary meaning of that term. An individual will also be an Australian resident if they:
- are domiciled in Australia; or
- are present in Australia for at least 183 days of the income year,
unless they have a permanent place of abode outside Australia.
2.62 A company is a resident of Australia if it is incorporated in Australia, if it carries on a business in Australia and has either its central management and control in Australia, or its voting power is controlled by shareholders who are Australian residents.
2.63 Tax residency can be a complex legal and factual question. The purchaser will often have limited information about the vendors to be able to determine the question. To overcome this difficulty for purchasers, additional tests determine when purchasers have sufficient knowledge about a vendor that withholding becomes appropriate.
2.64 Under the new law, the Commissioner may certify that, based on the information before the Commissioner, there is nothing to suggest that an entity is or will be a foreign resident during a specified period.
2.65 The certification as to residency by the Commissioner is only effective for the purposes of this Subdivision, and not for the purposes of the vendor's broader tax obligations. If the Commissioner decides to issue the certificate, it would be provided by the Commissioner to the entity, who would then need to provide it to the purchaser before settlement (that is, when the purchaser becomes the asset's owner). [Schedule 2, item 1, paragraph 14-210(2)(a) in Schedule 1 to the TAA 1953]
2.66 The purchaser is entitled to rely on the clearance certificate and would not be required to pay an amount to the Commissioner.
2.67 The Commissioner may set a time period for the validity of the clearance certificate. The purchaser may rely on the certificate for multiple acquisitions (that is, the current acquisition and any future acquisitions made in that specified timeframe). [Schedule 2, item 1, subparagraph 14-210(2)(a)(ii) in Schedule 1 to the TAA 1953]
2.68 A clearance certificate may only deal with the residency status of the vendor, and not the other matter for which a declaration is available (namely, a declaration that an interest is not an indirect Australian real property interest).
2.69 While the clearance certificate relates to the residency status of the vendor, the Commissioner may require an application for a clearance certificate to state whether the vendor holds the relevant asset on behalf of a foreign resident. This is intended to facilitate monitoring and compliance with existing tax laws. [Schedule 2, item 1, subsection 14-220(3) in Schedule 1 to the TAA 1953]
2.70 A vendor that is dissatisfied with a decision made by the Commissioner about whether to issue a clearance certificate may object in the manner set out in Part IVC of the TAA 1953. [Schedule 2, item 27, section 20-80 in Schedule 1 to the TAA 1953]
2.71 A certificate issued under this section will not amount to a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. An amendment is made to assist readers in this respect but is not intended to alter the operation of the law. [Schedule 2, item 1, subsection 14-220(4) in Schedule 1 to the TAA 1953]
Example 2.1 Louis purchases real estate in Melbourne from Lucas for $3 million. Although Louis believes that Lucas is an Australian resident, unless Lucas provides Louis with a clearance certificate from the Commissioner, Lucas will be considered a relevant foreign resident. Louis would need to make a withholding payment to the Commissioner under the new law.
Example 2.2 Jane plans to sell a piece of real estate in Sydney to John for $4 million. Because Jane knows that she is a foreign resident at the time the transaction is entered into, she does not apply for a certificate from the Commissioner. In the absence of a certificate, Jane will be considered a relevant foreign resident for the purposes of these amendments. John is required to make a withholding payment to the Commissioner under the new law.
The knowledge condition
2.72 The knowledge condition is only relevant to acquisitions of indirect Australian real property interests (other than company title interests) and options and rights to acquire TARP or indirect Australian real property interests. It is not relevant to TARP and indirect interests that constitute company title interests, where the clearance certificate process applies.
2.73 If a purchaser does not know or have reason to believe a vendor is a foreign resident, the knowledge condition ensures that the obligation to pay an amount to the Commissioner does not arise. This provides certainty to purchasers. Purchasers not comfortable applying the knowledge condition may instead seek a vendor declaration that confirms that a vendor is not a relevant foreign resident (see paragraphs 2.80 to 2.85).
2.74 The knowledge condition does not apply where the purchaser obtains a residency declaration from the vendor. The purchaser is entitled to rely on the declaration, unless they know it to be false.
2.75 The knowledge condition is also satisfied where the purchaser has specific knowledge that a vendor is a foreign resident. For example, a purchaser will have specific knowledge where the vendor discloses that they are a foreign resident for income tax purposes. It does not apply in cases of constructive knowledge. [Schedule 2, item 1, paragraph 14-210(1)(a) in Schedule 1 to the TAA 1953]
2.76 The knowledge condition is satisfied where the purchaser reasonably believes a vendor is a foreign resident. For example, a purchaser may have a reasonable belief if the purchaser learns that the vendor is likely to be living overseas (although, even if correct, this is not determinative as to tax residency). [Schedule 2, item 1, paragraph 14-210(1)(b) in Schedule 1 to the TAA 1953]
2.77 The knowledge condition is also satisfied where the purchaser has no reasonable grounds to believe that a 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 and maintained on the purchaser's behalf, about the acquisition; or
- the purchaser is authorised to provide a financial benefit (for example, to make the payment) to a place outside Australia (whether to a vendor or to anyone else).
[Schedule 2, item 1, paragraph 14-215(1)(c) in Schedule 1 to the TAA 1953]
2.78 This test will mean that where there are reasonable grounds to believe that the vendors are Australian residents, withholding will not be required, even if an amount is paid outside Australia, or a vendor has an address outside Australia. However, if there are no reasonable grounds to believe that the vendors are Australian residents, and the amount is to be paid outside Australia, or a vendor has a foreign address, the knowledge condition will be satisfied. Whether or not there are reasonable grounds to believe that a vendor is or is not an Australian resident is to be considered on an objective basis. The question is whether a reasonable person in the position of the purchaser would have thought that there were reasonable grounds to support the relevant belief.
2.79 The Regulations may prescribe additional circumstances where the knowledge condition will be satisfied. The Regulation-making power is intended to provide flexibility if it becomes necessary to prescribe additional tests in the future. [Schedule 2, item 1, paragraph 14-210(1)(d) in Schedule 1 to the TAA 1953]
Declarations as to residency
2.80 A declaration as to residency can be relied upon in relation to indirect Australian real property interests (other than company title interests) and options and rights to acquire TARP or indirect Australian real property interests. Such a declaration is not relevant to TARP and indirect interests that constitute company title interests, where the clearance certificate process applies.
2.81 Where the purchaser of such interests believes the vendor may be a foreign resident, they can request that the vendor make a declaration confirming their residency. The vendor will not be a relevant foreign resident where the vendor has made a declaration that they are an Australian resident (unless the purchaser knows the declaration to be false). [Schedule 2, item 1, subsection 14-210(3) and subsection 14-225(1) in Schedule 1 to the TAA 1953]
2.82 It is envisaged that vendor residents may use this declaration as a matter of course to establish their residency to a purchaser of indirect Australian real property interests or options and rights to acquire such interests or options and rights to acquire TARP. The declaration may be inserted into sale agreements as a standard clause contractual warranty. A purchaser that receives a declaration is entitled to rely on it (unless they know it to be false) and does not need to consider whether the reasonable grounds limbs of the knowledge condition are satisfied.
2.83 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 may be relied on. That a purchaser may have reasonable grounds to doubt the accuracy of a declaration does not, of itself, prevent the purchaser from relying on it.
2.84 A declaration is only effective in relation to the specific vendor. If an asset is acquired from multiple vendors, a purchaser may seek a declaration from each vendor.
2.85 A vendor may make a standing declaration which remains valid for 6 months after the day the declaration is made. [Schedule 2, item 1, subsection 14-225(3) in Schedule 1 to the TAA 1953]
Example 2.3 : Determining the residency of the vendor Andrew enters into an off-market transaction to acquire all of 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 in subsection 14-210(1) is satisfied. Andrew notifies the vendor that he intends to withhold a portion of the purchase price unless the vendor can provide Andrew with further information about his residency (or a declaration).The vendor provides Andrew with a declaration that states that the vendor is an Australian resident for income tax purposes, which Andrew does not know to be false. The knowledge condition is no longer satisfied 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 (provided he did not know it to be false) and no payment obligation would arise.
Declaration membership interest is not indirect Australian real property interest
2.86 Another declaration can be made in the case of CGT assets that are membership interests (for example shares in a company). The vendor is likely to be in a better position than the purchaser to determine whether the membership interests satisfy the definition of an indirect Australian real property interest. [Schedule 2, item 1, subsection 14-225(2) in Schedule 1 to the TAA 1953]
2.87 Membership interests that are not indirect Australian real property interests are not within the scope of the amendments. To support this, the amendments will not apply to a vendor where the purchaser relies on a declaration by the vendor that the interests are not indirect Australian real property interests. [Schedule 2, item 1, subsection 14-210(3) and subsection 14-225(2) in Schedule 1 to the TAA 1953]
2.88 Before making a declaration, the foreign resident vendor must consider the level of their stake in the entity to which the interests relate. In addition, the vendor must consider whether the principal asset test is satisfied in relation to the entity. See paragraphs 2.5 to 2.8 for when membership interests are indirect Australian real property interests.
2.89 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. [Schedule 2, item 1, paragraph 14-210(3)(b) in Schedule 1 to the TAA 1953]
2.90 A vendor may make a standing declaration which remains valid for 6 months after the day the declaration is made. [Schedule 2, item 1, subsection 14-225(3) in Schedule 1 to the TAA 1953]
Administrative penalties for false or misleading declarations
2.91 Penalties of up to 120 penalty units apply for declarations or purported declarations that are false or misleading in a material particular. [Schedule 2, item 1, section 14-230 in Schedule 1 to the TAA 1953]
2.92 The machinery provisions for these administrative penalties are set out in Division 298 of Schedule 1 to the TAA 1953.
The amount to pay to the Commissioner
2.93 A purchaser must pay, to the Commissioner, 10 per cent of the first element of the cost base for the CGT asset. This will usually be the total consideration they paid, or are required to pay, to acquire the CGT asset. The total consideration includes the market value of any property given in respect of acquiring the CGT asset (see subsection 110-25(2) of the ITAA 1997). [Schedule 2, item 1, subsection 14-200(3) in Schedule 1 to the TAA 1953]
2.94 When working out the amount to pay to the Commissioner, it is important to correctly identify the CGT asset acquired. This is particularly the case where multiple purchasers each purchase interests in a property.
Example 2.4 : Joint purchase of property Annette and Allen purchase a residential property for $3 million from a vendor they know is a foreign resident. They acquire title to the property as joint tenants.Under section 108-7 of the ITAA 1997, Annette and Allen are each taken to have acquired the property as tenants in common in equal shares.The CGT asset that Annette has acquired is a 50 per cent interest in the property. The acquisition cost of the asset is $1.5 million. Annette must pay $150,000 to the Commissioner. Allen must pay the same amount to the Commissioner.Between them, Annette and Allen are entitled to withhold $300,000 from the amount they pay to the vendor.
Variation of withholding amounts
2.95 The Commissioner may vary a payable amount, in relation to either a particular case or a class of cases. The variation may include a variation to nil. [Schedule 2, item 1, section 14-235 in Schedule 1 to the TAA 1953]
2.96 A vendor or a purchaser may apply to the Commissioner for a variation of the amount. Reasons for a variation could include that:
- the foreign resident will not make a capital gain on the transaction (for example because they will make a capital loss or a CGT roll-over applies);
- the foreign resident will otherwise not have an income tax liability (for example because of carried-forward capital losses or tax losses); or
- there are multiple vendors, only one of which is a foreign resident.
2.97 The Commissioner may issue a variation (other than a class variation) to the applicant. However, the variation is only effective if it is provided to the purchaser. [Schedule 2, item 1, subsections 14-235(2) and (3) in Schedule 1 to the TAA 1953]
Example 2.5 : Applying for and receiving a variation Victor is a foreign resident who is selling a commercial property with a cost base of $3 million.Victor does not expect to be able to sell the property for $3 million or more (i.e. he expects to make a capital loss on the sale).Victor applies to the Commissioner for a variation. The Commissioner issues a variation notice to Victor stating that the amount payable, to the Commissioner, by a purchaser of Victor's property is reduced to nil. The variation is subject to the condition that the purchase price for the property does not exceed $3 million.Later, Paul 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's liability to the Commissioner is reduced to nil.
2.98 Either party may object to a variation (other than a class variation) or the Commissioner's decision not to issue a variation. [Schedule 2, item 27, section 20-80 in Schedule 1 to the TAA 1953]
2.99 A variation made in a particular case is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003. An amendment is made to assist readers in this respect but is not intended to alter the operation of the law. [Schedule 2, item 1, subsection 14-235(4) in Schedule 1 to the TAA 1953]
2.100 A variation applying to a class of cases is a legislative instrument. [Schedule 2, item 1, subsection 14-235(5) in Schedule 1 to the TAA 1953]
Variation for sale of secured property
2.101 A creditor of the vendor may have a security interest (for example, a mortgage) over an asset that is subject to the amendments. There may be situations where the proceeds of the sale are insufficient to cover both the amount to be paid to the Commissioner and to discharge the debt the loan secures.
2.102 It is not the intention of these amendments to undermine the security of creditors in the event of a vendor's default. The Commissioner must consider this intention when deciding whether to vary a withholding amount. [Schedule 2, item 1, subsection 14-235(1) in Schedule 1 to the TAA 1953]
2.103 To support this power, a secured or unsecured creditor may apply to the Commissioner for a variation. [Schedule 2, item 1, subsection 14-235(3) in Schedule 1 to the TAA 1953]
Example 2.6 : Power of sale Chris, a foreign resident, owns a commercial property located in Australia. Chris owes $3 million to a bank, which is secured by a mortgage over the commercial property.Chris' business has been performing poorly and he has missed a number of repayments on the loan. The bank decides to exercise its power of sale.The property is sold for $2.9 million net of costs. The proceeds are insufficient to pay the Commissioner and discharge Chris' mortgage.Chris would prefer that the Commissioner is paid in preference to the bank because he would be entitled to a credit for this amount. 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. The Commissioner considers the circumstances and concludes that requiring an amount to be paid to the Commissioner would prevent the bank from recovering the debt from its secured interest.The Commissioner issues a notice to the bank that varies the amount to nil. The bank provides a copy of the notice to the purchaser. The purchaser is relieved of any obligation to pay an amount to the Commissioner.
Example 2.7 : Other secured creditors Daniel, a foreign resident, owns commercial property located in Australia. Daniel owes $2.9 million to a bank, which is secured by a mortgage over the property. Daniel has been meeting all of his obligations under the loan and there is nothing to suggest Daniel will have difficulty continuing to meet his obligations.Daniel enters into a contract to sell the property for $3 million. The purchaser knows that Daniel is a foreign resident and will be required to pay $300,000 to the Commissioner when the property settles. In these circumstances, there will be insufficient sale proceeds available at settlement to discharge the mortgage.Daniel is entitled to apply for a variation.
2.104 Where a purchaser's acquisition of property is the result of the exercise of an option, a special rule applies to avoid double counting. Where a purchaser is required to withhold, the amount to which the 10 per cent is applied is reduced by any payments the purchaser made for the option (or to renew or extend the option). It is also reduced by the market value of any property the purchaser gave for, or to renew or extend, the option. [Schedule 2, item 1, paragraph 14-200(3)(a) in Schedule 1 to the TAA 1953]
2.105 These special rules for options are designed to avoid double counting the purchase price of the option in determining the amount to be withheld. Under the existing law, an amount is required to be withheld from the purchase price at the time of the grant of the option (CGT event D2 happens to the foreign resident grantor of the option). When the option is exercised, the first CGT event is undone and the option payment is treated as part of the capital proceeds for CGT event A1 on the sale of an asset. The purchaser would then be entitled to withhold from the cost base of the asset, which is the sum of the option purchase price and the option exercise price (section 134-1 of the ITAA 1997). This would mean that the purchaser would effectively be required to withhold twice on the option purchase price.
2.106 This special rule avoids this double counting by reducing the amount to which the 10 per cent is applied by any payments the purchaser made for the option (or to renew or extend the option). The withholding amount is reduced on exercise of the option.
Requirements when paying the amount
When to pay an amount
2.107 The required amount must be paid to the Commissioner on or before the day the purchaser becomes the owner of the property. This is to be distinguished from the time the purchaser is taken to have acquired the asset for CGT purposes (generally backdated to the date the purchaser entered into the purchase contract). [Schedule 2, item 1, subsection 14-200(2) in Schedule 1 to the TAA 1953]
Example 2.8 : When to pay an amount when acquiring property Ben is acquiring a residential property for $3 million. Ben knows that the vendor of the property is a foreign resident and that the acquisition is subject to a withholding obligation.Ben enters into a contract for the purchase of the property on 1 August 2016 and pays a $150,000 deposit. The contract is settled on 1 October 2016 when Ben is required to pay the balance of $2.85 million to the vendor and receives a transfer of title to the property.Ben withholds $300,000 from the settlement amount (paying $2.55 million to the vendor). Ben must pay the $300,000 to the Commissioner by the same day, 1 October 2016.
2.108 No withholding obligation arises if the contract falls through and the change in ownership does not occur.
Form of payment
2.109 Payments to the Commissioner must be made through an electronic payment method approved by the Commissioner (for example Electronic Funds Transfer or BPAY). This is required through an amendment that applies section 16-85 in Schedule 1 to the TAA 1953 to the payments. [Schedule 2, item 17, subsection 16-70(3) in Schedule 1 to the TAA 1953]
2.110 The Commissioner may allow alternative means of payment, including payment by cheque.
Notification to the Commissioner
2.111 A purchaser paying an amount to the Commissioner must notify the Commissioner (section 16-150 in Schedule 1 to the TAA 1953). The notification must be in the approved form and will be used to collect information necessary for the amount to be credited to the appropriate foreign resident taxpayer.
2.112 No obligation is imposed to provide annual reports to the Commissioner under section 16-153.
2.113 The approved form may allow the purchaser to quote the vendor's tax file number if the vendor has provided one. Amendments are made to allow purchasers to collect tax file numbers from foreign residents (where they have them) and provide them to the Commissioner. This will assist the Commissioner to match withholding payments to specific foreign residents. [Schedule 2, items 2 and 10 to 12, paragraph 202(s) of the ITAA 1936, and paragraphs 8WA(1AA)(b), 8WB(1A)(a) and 8WB(1A)(b) of the TAA 1953]
Requirement to register
2.114 A purchaser paying an amount to the Commissioner must apply to register as a withholder (section 16-140 in Schedule 1 to the TAA 1953).
2.115 Withholders completing the one approved form when paying withheld amounts to the Commissioner will comply with both sections 16-140 and 16-150.
Withholding tax credits
2.116 A purchaser required to pay an amount to the Commissioner is entitled to withhold the amount from the foreign resident. [Schedule 2, item 16, subsection 16-20(2) in Schedule 1, to the TAA 1953]
2.117 The foreign resident vendor will be entitled to a credit for the amount paid to the Commissioner (Division 18 in Schedule 1 to the TAA 1953). The entitlement to a credit arises when the Commissioner makes an income tax assessment (or determines that no income tax is payable) for the income year. The vendor must lodge an income tax return to claim the credit.
2.118 The main crediting provision is section 18-15, with section 18-20 applying where the recipient is a partnership and section 18-25 applying to trustees.
2.119 Amendments are made to the definitions of 'amount required to be withheld', 'amount withheld' and 'withholding payment' to ensure that Division 18 applies correctly to amounts paid to the Commissioner. [Schedule 2, items 5 to 9, subsection 995-1(1) of the ITAA 1997]
2.120 The availability of a credit to a foreign resident is contingent on the purchaser paying the amount to the Commissioner. A credit does not arise merely because an amount has been withheld from a payment made to the foreign resident that the withholder was required to pay to the Commissioner. See sections 18-15 and 18-20, and paragraph (b) of the amended definition of 'amount withheld'.
2.121 Part IIB of the TAA 1953 (about Running Balance Accounts) sets out how the Commissioner must treat a credit. These generic rules will apply to credits for amounts withheld under the new withholding regime.
Refund of amounts withheld in error
2.122 Subdivision 18-B provides for withholders or the Commissioner to refund withheld amounts, or amounts paid to the Commissioner, where there has been an error.
2.123 The Commissioner may refund an amount paid under the amendments (per section 18-70). However, a person receiving a payment, from which an amount is withheld under the amendments, may not claim a refund under section 18-65 from the purchaser. [Schedule 2, items 22 and 23, subparagraph 18-65(1)(a)(ii) and paragraph 18-65(6)(c) in Schedule 1 to the TAA 1953]
Penalties and offences
2.124 The existing administrative penalties, specified in sections 16-30 and 16-35 in Schedule 1 to the TAA 1953, for failures to withhold will apply for the new withholding provisions. No amendment is required. This is because sections 16-30 and 16-35 impose a penalty where there is a failure to pay an amount as required by Division 14, and the new obligations created by these amendments are inserted into Division 14.
2.125 Similarly, the offence provision in subsection 16-25(2) for failing to withhold will apply to the new withholding provisions.
2.126 The general interest charge will apply to amounts that are not paid to the Commissioner by the required date. [Schedule 2, items 17 and 18, section 16-80, and subsections 16-70(3) and (4) in Schedule 1 to the TAA 1953]
2.127 Division 268 in Schedule 1 to the TAA 1953 sets out provisions for the recovery of unpaid withholding amounts and allows the Commissioner to make an estimate of a person's withholding liability. Division 269 imposes penalties on directors of companies that fail to meet their withholding obligations. Division 298 sets out the machinery provisions for the collection and remission of penalties, and the imposition of interest on unpaid penalties.
2.128 The offence provision of section 20-35 will also apply to the new withholding obligations. Section 20-35 makes it an offence to claim, falsely, a credit owing to a person who has had a withholding payment made on their behalf.
2.129 Administrative penalties apply to making a false or misleading declaration (see paragraphs 2.91 to 2.92 above).
Application of the regime to particular transactions
2.130 This section details how the components of the regime operate together in particular transactions. This section also discusses interactions with other areas of the law.
2.131 A lease is a CGT asset that is TARP under section 855-20 of the ITAA 1997. Therefore, the acquisition of a lease asset by a lessee could be subject to withholding if the lessee has reason to believe the lessor is a foreign resident. However, the withholding obligation will only arise with respect to lease premiums paid for the grant of the lease.
2.132 A lease that does 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. This amount is used to determine the withholding amount.
Example 2.9: Lease Richard, a foreign resident, owns a commercial property that he leases to Leigh. Leigh knows that Richard is a foreign resident.Under the terms of the lease, Leigh agrees to pay Richard $3 million as a lease premium and to pay rent of $4,000 a month.The first element of the cost base of Leigh's lease asset is $3 million. Leigh must pay 10 per cent of this amount, $300,000, to the Commissioner.CGT event F1 happens to Richard and his capital proceeds are $3 million. Richard will be entitled to a withholding tax credit of $300,000 for the amount withheld.The amendments do not apply to the rent payable under the lease because it does not form part of Leigh's first element of cost base.
2.133 A foreclosure is an uncommon situation in Australia where a secured creditor assumes ownership of a secured asset. It is generally a remedy of last resort for the creditor and is generally only available where the creditor has attempted to exercise a power of sale.
2.134 The amendments apply to a foreclosing creditor in the same way they apply to a purchaser of an asset.
Example 2.10: Foreclosures Mick, a foreign resident, owns a commercial property. Mick has a loan with a bank, which is secured by a mortgage over the property.Mick is in default on his repayment obligations. The bank attempts to exercise its power of sale to recover the debt. The property is offered for sale in a public auction but the auction fails to receive a bid sufficient to discharge the mortgage and cover the bank's expenses.The bank seeks, and is granted, an order for foreclosure. This results in the bank acquiring legal title to the property from Mick. As the bank has acquired title, the bank is the purchaser for the purposes of these amendments and would be subject to the withholding obligation.The bank is entitled to apply for a variation to the withholding amount. In considering the application, the Commissioner will take into account the policy intention that these amendments do not prevent the bank from realising the value of its security. See paragraphs 2.101 to 2.103.As the market value of the property is less than Mick's debt, the Commissioner considers that any withholding obligation would further diminish the value of the bank's security. The Commissioner, therefore, varies the withholding amount to nil.
2.135 The new withholding obligation is added to lists of withholding obligations and tax-related liabilities. [Schedule 2, items 13, 14 and 28, subsections 10-5(2) and 250-10(2) in Schedule 1 to the TAA 1953]
2.136 Various references to Division 14 are updated to reflect that the Division contains multiple obligations. [Schedule 2, items 19 to, 21 and 24, paragraphs 16-140(1)(b), 16-143(2)(b) and 16-150(b), and subparagraph 18-70(1)(a)(ii) in Schedule 1 to the TAA 1953]
2.137 Notes are added to Division 855 of the ITAA 1997 (about the capital gains tax obligations of foreign residents) cross-referencing the new withholding obligation. [Schedule 2, items 3 and 4, notes to section 855-15 of the ITAA 1997]
2.138 The amendments apply in relation to acquisitions on or after 1 July 2016. [Schedule 2, item 30]
2.139 A purchaser is generally taken to have acquired an asset on the date they entered into the contract to acquire it (see Division 109 of the ITAA 1997). Therefore, the amendments will not apply to transfers that occur under a contract entered into prior to 1 July 2016.
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Foreign resident capital gains tax withholding regime
2.140 Schedule 2 is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
2.141 Schedule 2 introduces a new regime that imposes withholding obligations on the purchasers of certain Australian assets. The purpose of the regime is to assist in the collection of foreign residents' capital gains tax (CGT) liabilities.
Human rights implications
2.142 Schedule 2 does not engage any of the applicable rights or freedoms.
2.143 Schedule 2 is compatible with human rights as it does not raise any human rights issues.