New Australian Federal Government legislation will require 10% of the value of transactions captured by the regime to be paid to the Australian Taxation Office (ATO).
The new regime comes into effect on 1 July 2016 and will affect a wide variety of sales for commercial industrial, rural and residential land as well as sales of companies where the majority of their assets are property, family law property settlements, gifts made under a Will or internal family restructures.
Who is a foreign resident?
Every vendor is deemed a foreign resident at first instance but there are two exemptions.
For sales of land, if the value is under $2 million, the sale is automatically exempt. Where the value is above $2 million the vendor can apply to the ATO for a clearance confirming their Australia residency, which will authorise the purchaser to pay all proceeds to the vendor without deduction.
The ATO is implementing a free ‘automated’ online process for issuing a clearance certificate whereby a vendor can enter their details, the information is compared with ATO records and in most cases, the clearance certificate will be issued within 3 to 4 days. These clearance certificates are valid for 12 months and can be used for multiple transactions provided they remain valid.
For other sales such as share sale agreements or option contracts the vendor can make a declaration that they are not a foreign resident or that the majority of the assets of the company are not property related. In most circumstances, the purchaser can rely on this declaration and pay the full amount to the vendor. Declarations can only be relied upon for 6 months and may need to be provided multiple times during a lengthy contract if a vendor wants to ensure they receive the full amount of money under the contract.
How much should be withheld?
The general rule is that 10% of the purchase price must be paid to the ATO. The ATO can vary this amount depending on the circumstances. Circumstances which may give rise to a variation application include where only one vendor is foreign, the vendor will make a loss on the sale, where the transaction is for non-cash consideration or a mortgagee requires the full amount of settlement monies to release the mortgage.
If a purchaser is provided with a variation notice, the purchaser only has to pay the rate stated in the variation notice.
The variation can be applied for on the ATO website and may take up to 28 days to process depending on the transaction and surrounding circumstances.
How is a payment made?
Before settlement the purchaser should go to the ATO website and complete a ‘purchaser payment notification’ form. The purchaser will then be issued with a payment slip, reference and barcode. The payment can be made online or by sending a cheque in the mail.
What happens if the tax isn’t withheld?
A purchaser who fails to pay the amount to the ATO can be liable to pay an amount equal to that required to be paid in the first instance, plus a penalty (which can also be equal to the amount required to be paid), plus interest.
The regime imposes significant risks to both vendors and purchasers but these can be managed by correctly identifying the application of the regime to a transaction and taking the appropriate steps. Parties to property or share transactions, gifts or restructures should seek expert advice.
This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.