Withholding tax

All sales of real estate over $2 million made after 1 July 2016 will be presumed to be made by a foreign resident and therefore be liable to a 10% withholding payment unless the vendor obtains a Clearance Certificate from the ATO.

The ATO is concerned that foreign residents are not paying capital gains tax and has introduced a ‘withholding payment’ regime obliging purchasers to withhold and pay to the ATO 10% of the purchase price on account of the vendor’s CGT liability. To better understand this measure, I attending an ATO Information session.

I was greeting in the foyer by Person ONE who directed me to a line where, eventually, Person TWO checked my photo ID. and then directed me to an adjoining line where, eventually, Person THREE asked me to sign in. He then directed me to Person FOUR who invited me to take a seat in the foyer. Eventually Person FIVE invited me to join a group being escorted to the lift and we were shown into a lift, only to find that that lift did not stop at the right floor, so we returned to ground, changed lifts and, eventually, found ourselves on the eighth floor where we were meet by person SIX, who escorted us to the seminar room. We were advised that sanitary and sustenance facilities were available but that we would need to be escorted to those facilities by one (or perhaps more) of the large cast of escorts standing at the back of the room. As the level of participation of the escorts in those sanitary and sustenance activities was not disclosed, I spent a very uncomfortable 2.5 hours not willing to find out.

Despite the need for prior registration and this rigorous security campaign, there were not enough copies of the papers available for the 100 odd people in attendance – that does not bode well for all of these $200,000+ payments that are going to be pouring into the ATO from 1 July.

The most important aspect of the withholding regime is for vendors and purchasers to understand that ALL $2m+ transactions are subject to the tax UNLESS the vendor obtains, and provides to the purchaser, a Clearance Certificate. In the absence of a Clearance Certificate, the purchaser must deduct 10% of the purchase price and remit it to the ATO immediately after settlement. Failure to do so will make the PURCHASER liable to the ATO for the amount.

The key to the vendor obtaining a Clearance Certificate will be the vendor’s current registration with the ATO as a Australian resident tax payer. This places a premium on early consideration of the consistency between the name of the registered proprietor and the registered tax payer. If the vendor has tax records that PRECISELY match the title registration then a Clearance Certificate will issue on-line. This is expected to be 80% of the time. However, if there is a discrepancy between the name on the title and the name of the tax payer, the application goes off-line and delay will be inevitable while the vendor provides the ATO with additional documentation to align the registered proprietor with a registered Australian resident taxpayer.

Clearance Certificates will be available on-line from 27 June 2016, are valid for 12 months and may be used in respect of more than one property. Authentication is problematic.

If the purchaser does not receive a Clearance Certificate then the purchaser is obliged to remit the withholding payment and does so by completing a Purchaser Payment Notification on-line and receiving a Payment Reference Number allowing for payment on-line, at a Post Office or by mail. The ATO will issue payment confirmation to both the purchaser and the vendor.

Of enormous practical importance is the question whether the 10% withholding is to be 10% of ‘the price’, a relatively simple calculation, or is GST to increase the withholding and will adjustments effect the withholding? As presently advised, it appears that a flat 10% of the contract price will be acceptable but hopefully a Ruling will be available before 1 July.