Capital gains withholding – a guide for conveyancers

What is FRCGW?

Foreign resident capital gains withholding (FRCGW) applies to vendors disposing of certain taxable property under contracts entered into from 1 July 2016.

The FRCGW tax rate is 12.5%.

It applies to real property disposals where the contract price is $750,000 or more.

For contracts that were entered into from 1 July 2016 and before 1 July 2017, even if they did not settle until after 1 July 2017, the FRCGW withholding tax rate is 10% and applies to real property disposals where the contract price is $2 million and above.

Before assisting clients to meet the Foreign resident capital gains withholding (FRCGW) requirements, conveyancersExternal Link who are not legal practitioners or registered tax agents need to understand what they can or can't do under the Tax Agent Services Act 2009 (TASA).

Background

Purchasers must withhold 12.5% of the purchase price and pay it to us if a vendor enters into a contract on or after 1 July 2017 and disposes of the following asset types:

• real property – taxable Australian real property with a market value of $750,000  
  • vacant land, buildings, residential and commercial property
  • mining, quarrying or prospecting rights where the material is situated in Australia
  • the grant of a lease over real property in Australia.
   
• other assets  
  • indirect Australian real property interests in Australian entities whose majority of assets consist of the above-mentioned asset types
  • options or rights to acquire any of the above asset types.
   

Where any vendor disposes of Australian real property with a market value of $750,000 or more, the purchaser will be required to withhold 12.5% of the purchase price and pay it to us – unless the vendor provides the purchaser with an ATO-issued clearance certificate to ensure the amounts are not withheld from their sale proceeds.

All property transactions with a market value of $750,000 or more will need the vendor and purchaser to consider if they need a clearance certificate.

Vendors who are an Australian resident for tax purposes, but who have not obtained a clearance certificate before settlement, are taken to be foreign residents for the purposes of FRCGW. They will need to lodge an income tax return and claim a credit for the amount withheld. A credit for the amount withheld for foreign resident capital gains is applicable to the year the contract was signed. Therefore, it may take some time before the vendor can lodge the income tax return to declare the capital gain, be assessed and then given any applicable refund for the amount withheld

Purchase price

In many cases, 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, we will accept the purchase price as a proxy for market value.

When purchasers must withhold

The purchaser has an obligation to withhold when:

• any vendor of the asset is a relevant foreign resident
• the asset that the purchaser has acquired is a relevant asset
• the acquisition is not an excluded transaction
• the vendor does not provide a clearance certificate or make a relevant declaration.

Vendors

The obligation to withhold only arises if the vendor is a relevant foreign resident for the purposes of this measure.

The vendor is the entity that holds the legal title to the asset to which this withholding measure applies.

Where the asset is held on behalf of another entity, the vendor is the legal owner of the asset, for example, the trustee or custodian who holds the legal title on behalf of beneficiaries.

Unless an exception applies, the vendor is a relevant foreign resident if any of the following apply:

• The purchaser knows the vendor is a foreign resident.
• The purchaser reasonably believes the vendor is a foreign resident.
• The purchaser does not reasonably believe the vendor is an Australian resident, and either
  • has a record about the acquisition indicating that the vendor has an address outside Australia
  • is authorised by the vendor to provide a related financial benefit (for example, make a payment) to a place outside Australia (whether to the vendor or to anyone else).
   
• The vendor has a connection outside Australia of a kind specified in the regulations.
• The capital gains tax (CGT) asset to which the transaction relates is
  • taxable Australian real property
  • an indirect Australian real property interest, the holding of which causes a company title interest to arise.
   

Exceptions

A vendor is not a relevant foreign resident if they provide the purchaser with:

• a valid clearance certificate in transactions involving taxable Australian real property or indirect Australian real property company title interests (even if the vendor is actually an Australian resident for other income tax purposes)
• a valid vendor declaration in transactions involving other assets covered by the foreign resident capital gains withholding law.

Taxable Australian real property or indirect Australian real property company title interests

Where the capital gains tax (CGT) asset to which the transaction relates is taxable Australian real property or an indirect Australian real property company title interest, the entity is treated as a relevant foreign resident unless a clearance certificate is obtained from us certifying that the entity is not a relevant foreign resident for the purposes of this law.

This rule applies even if the vendor is actually an Australian resident for other income tax purposes.

Clearance certificates

We may issue a certificate (known as a clearance certificate) stating that the vendor of taxable Australian real property or an indirect Australian real property company title interest is not a relevant foreign resident. The clearance certificate will specify that withholding is not required on the acquisition of the property.

A clearance certificate is valid for 12 months from the date issued, so the vendor may be able to use it for multiple disposals of real property or indirect Australian real property company title interests that occur within that period. The vendor does not have to reapply for a clearance certificate each time they dispose of a property, as long as the clearance certificate is valid.

The clearance certificate may be provided to the purchaser at any time during the transaction but must be provided 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 as early as practical in the sale process.

An application for a clearance certificate can be lodged prior to a contract for sale being entered into.

The purchaser can rely on the clearance certificate as proof that they are not required to withhold. Once the purchaser has received a copy of the clearance certificate they have met their obligation, even if the vendor’s circumstances change during the settlement period.

Australian resident vendors who do not provide a clearance certificate to the purchaser at or before settlement will need to lodge an income tax return, for the applicable year the contract was signed, and claim a FRCGW credit for the withheld amount. It may take months before the vendor can lodge the income tax return to declare the capital gain and claim a credit for the amount withheld.

The amount withheld may be refunded in part or in full once the income tax return is processed (any tax refund calculated on the vendor’s notice of assessment will be used to offset other tax debts, including debts on hold or debts with other government agencies before the refund is paid to the vendor). It will be refunded in full if there is no CGT payable on the sale of the property. For example, it was their main residence or there was a capital loss from its sale, and there are no tax debts payable.

To obtain a clearance certificate, a vendor who is an Australian resident (or their representative) must complete an online Foreign resident capital gains withholding clearance certificate applicationThis link opens in a new window form (NAT 74883).

ConveyancersExternal Link who are not legal practitioners or registered tax agents cannot complete the form on behalf of the vendor. They can either provide the PDF version of the clearance certificate form (or URL hyperlink) to the vendor for them to complete. Conveyancers may either submit the completed PDF form to us via mail or enter the data into the online form (retaining a copy of the vendor-signed PDF form and keeping a printout of data entered into the online form).

 

How long it will take to get a clearance certificate

We issue clearance certificates within 28 days of receiving the application.

Where the application requires further information from the applicant or has factors that may be considered higher risk or unusual, this will increase the time it takes to process. If the application is lodged close to the settlement date, we cannot guarantee we can process it by the settlement date as we will not disadvantage those other applicants who applied earlier by delaying their application to process yours.

Clearance certificates will be sent by email if an email address is provided in the application. Otherwise clearance certificates will be mailed to the vendor and the vendor’s contact using the addresses provided in the application.

To avoid unanticipated delays, vendors seeking a clearance certificate should apply through the online system as early as practical in the sale process. This could be before offering the property for sale.

Individual vendors can obtain a copy of their clearance certificate outcome online:

1. login to myGov and go to ATO online services
2. under the My profile menu, go to Communication
3. go to History.

Clearance certificate validity

A clearance certificate is valid for 12 months from the date of issue. It is only valid for the listed vendor and the period noted on it.

Vendors must ensure that the details on their clearance certificate application are accurate, so the clearance certificate issues in the correct name.

It is the vendor’s responsibility to provide the purchaser with the clearance certificate and ensure it is valid.

For the purchaser to rely on the clearance certificate, the:

• name of the vendor on the certificate must match the name on the certificate of title (unless proof of name change is provided) – the clearance certificate issues in the legal name that we have on our systems. Before applying ensure the vendor’s name is correct on our systems and update your name if required
• date the certificate is given to the purchaser must be a date that falls within the clearance certificate period and must be provided before settlement.

When a purchaser receives a clearance certificate from a vendor and sees that it is valid, they can rely on it and not withhold. There is no need for the purchaser to question the residency of the vendor.

However, if the clearance certificate does not meet these conditions, the purchaser is required to withhold 12.5% of the purchase price.

Although not a requirement, purchasers may check the validity of clearance certificates with us prior to deciding whether to withhold the 12.5% amount from the purchase price. Phone us on 13 28 66 (fast key codes 4 2) to confirm the validity of the clearance certificate by providing:

• the number from the ‘Our reference’ field at the top of the certificate
• the vendor’s name as it appears on the clearance certificate.

Where there are multiple vendors

A clearance certificate only applies to the entity specified on the certificate. If an asset has multiple vendors, each vendor will need to supply the purchaser with a clearance certificate to ensure amounts are not withheld.

The rules apply if the market value of the asset acquired is exactly $750,000

The transaction will only be excluded from the rules if the market value of the taxable Australian real property or company title interest acquired is less than $750,000.

If the market value is unknown

If the vendor is uncertain whether the $750,000 threshold will be reached, for example because the property is going to auction or a sales contract is yet to be signed, they can be conservative and apply for a clearance certificate. If the property is then sold for less than $750,000, the vendor does not need to provide the purchaser with the clearance certificate.

Disbursements and other costs as part of the market value of the asset

We recognise that disposals of real property may involve the payment of disbursements as part of the contract.

If the adjustment changes the consideration paid for the asset, then the calculation of the amount to be withheld should be based on the final adjusted purchase price.

Where 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 (for example, for council rates, water and sewer charges and strata levies). Therefore, the $750,000 threshold test is applied to the purchase price before adjustment for disbursements.

Other assets

For other assets, the purchaser’s decision about whether the vendor is a relevant foreign resident depends on whether the purchaser either:

• has received one of two declarations which they do not know to be false, either
  • a residency declaration
  • a declaration that the membership interest is not an indirect Australian real property interest
   
• knows, or has reasonable grounds to believe, the vendor is a foreign resident (referred to as the knowledge condition).

A vendor may make a standing declaration which remains valid for six months after the day the declaration is made.

The purchaser can rely on the declaration unless they know it to be false.

Residency declarations

The vendor will not be a relevant foreign resident where they have provided a declaration to the purchaser that they are an Australian resident (unless the purchaser knows it to be false).

A declaration is only effective in relation to the specific vendor. If an asset is acquired from multiple vendors, a purchaser requires a declaration from each vendor or they must withhold.

A declaration as to residency can be relied upon for:

• indirect Australian real property interests (other than company title interests)
• options and rights to acquire taxable Australian real property or indirect Australian real property interests.

A purchaser can rely on a declaration, even if a purchaser has reasonable grounds to doubt its accuracy.

However, if the purchaser knows the declaration is false, the declaration has no effect on the obligation to withhold. 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 can be relied on.

Declarations that the membership interest is not an indirect Australian real property interest

A vendor can make a declaration that the CGT asset is a membership interest, but not an indirect Australian real property interest, because the membership interest does not satisfy either the:

• non-portfolio interest test
• principal asset test.

Membership interests that are not indirect Australian real property interests are not within the scope of the law.

The vendor is likely to be in a better position than the purchaser to determine whether the membership interests satisfy the tests for an indirect Australian real property interest.

To support this, the obligation to withhold does not apply where the purchaser relies on a declaration by the vendor that the interests are not indirect Australian real property interests. 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.

If the vendor does not supply a declaration when requested

If the vendor does not supply a declaration when requested, the purchaser should withhold 12.5% from the purchase price at settlement.

When a declaration from a vendor is valid

A vendor’s declaration is valid for six months from the date it is signed by the vendor. It is only valid for the listed vendor and specified period on the declaration.

It is the vendor’s responsibility to provide the purchaser with a declaration and ensure it is valid at the time it’s provided.

The purchaser can rely on the declaration if the:

• name of the vendor on the declaration matches the name of the owner of the asset
• date the vendor provides the declaration to the purchaser is a date that falls within the specified period on the declaration and is provided before settlement.

When a purchaser receives a valid declaration from a vendor they can rely on it and not withhold.

If the declaration does not meet these conditions, the purchaser must withhold 12.5% of the purchase price.

There is no declaration form

However a template that can be used is available for download from our website at ato.gov.au/FRCGW.

If there are multiple vendors

A declaration is only valid for the vendor specified in the declaration. If an asset is acquired from multiple vendors, each vendor would need to provide the purchaser with their own declaration to ensure that the withholding obligation does not apply to each of them.

Declarations and the disposal of real property

A vendor cannot use a declaration to avoid having the purchaser withhold the 12.5% withholding in relation to the disposal of real property.

Penalties for false declarations

A vendor who makes a declaration that is false or misleading will have a penalty imposed upon them by us. The amount of the penalty varies depending on the severity of the offence.

The knowledge condition

The purchaser only has to consider the knowledge condition if the vendor has not supplied a vendor declaration.

The knowledge condition is satisfied where the purchaser:

• has specific knowledge that the vendor is a foreign resident – for example, the purchaser will have specific knowledge if the vendor discloses that they are a foreign resident for income tax purposes
• reasonably believes that the vendor is a foreign resident – for example, the purchaser may have a reasonable belief if they learn the vendor is likely to be living overseas
• has no reasonable grounds to believe the vendor is an Australian resident, and the amount is to be paid outside Australia, or the vendor has a foreign address.

Where there are reasonable grounds to believe the vendor is an Australian resident, withholding will not be required, even if an amount is paid outside Australia, or the vendor has an address outside Australia.

Reasonable grounds to believe the vendor is (or is not) an Australian resident must be considered on an objective basis. The question is whether a reasonable person in the position of the purchaser would have thought there were reasonable grounds to support this belief.

If the purchaser does not know or have reason to believe the vendor is a foreign resident, the knowledge condition ensures that the obligation to pay an amount to us does not arise. This provides certainty to purchasers.

Purchasers who are not comfortable applying the knowledge condition can ask the vendor to supply a vendor declaration. If the vendor does not supply a valid vendor declaration then the purchaser can assume the vendor is a relevant foreign resident and that they must withhold.

 

Assets

The law applies to the following assets:

• taxable Australian real property
• an indirect Australian real property interest
• an option or right to acquire such property or such an interest.

The law only applies to these assets. Transactions involving other assets that are taxable Australian property are not subject to withholding, for example, an asset used in running a business through an Australian permanent establishment is excluded.

Taxable Australian real property

A CGT asset will be taxable Australian real property if it is:

• real property situated in Australia (including a lease of land, if the land is in Australia)
• a mining, quarrying or prospecting right (to the extent that the right is not real property) if the minerals, petroleum or quarrying materials are in Australia.

For the purposes of this measure, real property includes vacant land, buildings, residential and commercial property, and indirect Australian real property interests, the holding of which causes a company title interest to arise.

Indirect Australian real property interest

For a membership interest in an entity to be an indirect Australian real property interest at a particular time, the membership interest must satisfy two tests, being both:

• the non-portfolio interest test
• the principal asset test.

Membership interest includes shares in a company.

The non-portfolio interest test

An interest held by an entity (the holding entity) in another entity (the test entity) is a non-portfolio interest if the sum of the membership interests held by the holding entity (and their associates) in the test entity is 10% or more.

The test is satisfied if the membership interest is a non-portfolio interest at the time of the transaction, or through a 12-month period in the last 24 months leading up to the transaction.

The principal asset test

The principal asset test is used to determine if an entity’s underlying value is principally derived from Australian real property.

A membership interest in an entity passes the principal asset test if the sum of the market value of the entity’s assets that are taxable Australian real property exceed the sum of the market value of the assets that are not.

Options and rights to acquire certain assets

An option or right to acquire property is a CGT asset of the holder of the right. Where an option or a right is granted by a foreign resident over taxable Australian real property or an indirect Australian real property interest, the granting of the option or right will be subject to withholding.

Where the purchaser subsequently acquires the asset from the foreign resident as a result of exercising the option, the amount to which the 12.5% withholding applies is the amount paid for the asset, disregarding any amount the purchaser paid for the option, including the market value of any property they gave for the option (or to renew or extend the option).

Excluded transactions

The law excludes certain transactions from the obligation to withhold. The vendor will need to determine their income tax or capital gains tax obligations when completing their income tax return.

Taxable Australian real property valued at under $750,000

The law excludes transactions involving taxable Australian real property with a market value of less than $750,000. The exclusion applies for all taxable Australian real property, including:

• residential premises
• commercial property
• vacant land
• leasehold
• easements
• covenants
• mortgages
• stratum title schemes.

In most cases, 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, we will accept the purchase price as a proxy for market value.

 

Company title interests valued at under $750,000

The law excludes transactions involving membership interests that cause a company title interest to arise where those membership interests have a market value of less than $750,000.

This aligns the treatment for entities that own property through company title with the treatment for those that own property through strata title.

Other indirect real property interests do not fall within this exclusion.

Transactions on an approved stock exchange

The law excludes transactions made on an approved stock exchange.

The nature of these transactions makes it impossible for a purchaser to determine the identity and residency status of the vendor.

Transactions on a crossing system

The law excludes from withholding any transactions conducted using a crossing system.

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.

As with transactions that occur on an approved stock exchange, it may not be possible for a purchaser to determine the identity and residency status of the vendor.

Securities lending arrangements

A ‘securities lending arrangement’ is an arrangement where 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.

The law excludes such transactions.

External administration and bankruptcy

The law excludes transactions where the vendor is in external administration or transactions arising from the administration of a bankrupt estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law.

Varying the amount to be withheld

The amount to be withheld can be varied by us or at the initiative of a party with an interest in a transaction, including a creditor. This supports the principle whereby we must take a creditor’s rights into account.

Vendors can apply for a variation where all of the following apply:

• they are not entitled to a clearance certificate
• a vendor’s declaration is not appropriate
• there is a reason as to why 12.5% withholding is too high taking into account the actual Australian tax liability on the sale of the asset.

Reasons for a variation could include instances where:

• the foreign resident will not make a capital gain on the transaction (for example, because they will make a capital loss or a CGT rollover applies)
• the foreign resident will otherwise not have an income tax liability (for example, because of carried-forward capital losses or tax losses)
• there are multiple vendors, only one of whom is a foreign resident
• a creditor of the vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures.

If a vendor doesn't provide a variation at or before settlement, the purchaser must withhold 12.5% of the purchase price for transactions above $750,000. The FRCGW amount has not been withheld in error, either in part or in full, where the vendor is entitled to a variation and didn't obtain one before settlement.

The vendor will need to lodge a tax return, claim a credit for the withheld amount and declare their capital gain (declaring an amount of ‘0’ if there is no capital gain or was a capital loss). A credit for the amount withheld for foreign resident capital gains is applicable to the year the contract was signed. Therefore, it may take some time before the vendor can lodge the income tax return to declare the capital gain and claim any available credit for the amount withheld. Any excess amount withheld may be refunded after the tax return is assessed.

Foreign residents for tax purposes who held property on 9 May 2017 were able to claim the CGT main residence exemption where the CGT event (disposal) of the property occurred on or before 30 June 2020.

 

 

How to apply for a variation

To apply for a variation, the vendor or vendor’s creditor needs to complete the online Foreign resident capital gains withholding rate variation application form. To access the form, visit ato.gov.au/FRCGW.

If the vendor hasn’t lodged a variation certificate online, conveyancers (who are not legal practitioners or registered tax agents) cannot complete the form on behalf of the vendor. They can provide either the PDF version of the variation form (or hyperlink) to the vendor for completion. Conveyancers may submit the completed PDF form to us via mail or fax, or enter the data into the online form (retaining a copy of the vendor-signed PDF form and keeping a printout of data entered into the online form).

Time it takes to obtain a variation notice

In the majority of cases (where we have received all the required information) a variation notice will be issued within 28 days.

Variation notices will be sent by email if an email address is provided in the application. Otherwise notices will be mailed to the vendor and the applicant using the addresses provided in the application. The variation notice should be shown to the purchaser before settlement to ensure the reduced withholding rate applies.

Calculating the reduced rate of withholding

Vendors need to calculate their reduced rate of withholding. This could be a rate between nil and 12.49%, for example, if you made no capital gain put in 0%.

Any varied rate approved by us will depend on the information provided by the vendor in their application.

Variation notices and multiple vendors

A variation notice applies to the specified vendor and applicable asset on the notice. If an asset is acquired from multiple vendors, each vendor will need to supply the purchasers with separate variation notices if a reduced rate of withholding is to apply to each vendor.

Variation notice validity

A variation notice is valid for 12 months from the date of issue for the listed vendor and applicable asset on the notice.

Vendors must ensure the details on their application are accurate so the variation notice issues with the correct vendor and applicable asset details.

It is the vendor’s responsibility to provide the purchaser with the variation notice and ensure it is valid at the time of settlement.

For the purchaser to rely on the variation notice the:

• name of the vendor and applicable asset details on the notice must match those on the certificate of title or other asset ownership documentation
• settlement date must be on or before the expiry date on the variation notice.

When a purchaser receives a valid variation notice from a vendor they can rely on it and not withhold.

If the variation notice does not meet the above-mentioned conditions, the purchaser is required to withhold 12.5% of the purchase price.

A purchaser can check the validity of a variation notice with us prior to deciding whether to withhold the 12.5% amount from the purchase price. Phone us on 13 28 66 (fast key codes 4 2) to confirm the validity of the variation notice, by providing the:

• number from the ‘Our reference’ field at the top of the notice
• vendor’s name, varied rate and applicable asset details as they appear on the notice.

Calculating the amount to withhold

Where a purchaser has determined they have an obligation to withhold, they must withhold 12.5% (or a varied rate as per a valid variation certificate) from the ‘first element of the cost base’ of the asset.

The first element of the cost base is an existing tax concept which is the amount of money paid (or required to be paid) or the market value of any property given (or required to be given) to acquire the asset.

However, as purchase price is understood by vendors and purchasers, and in many instances will be equal to the first element of the cost base, where the transaction is at arms-length, the purchase price may be used in determining how much withholding is required.

We recognise that some assets subject to this withholding measure may involve the payment of disbursements as part of the contract. Where 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 (for example, for council rates, water and sewer charges and strata levies). Therefore, the $750,000 threshold test for taxable Australian real property is applied to the purchase price before adjustment for disbursements.

Multiple purchasers

Where there are multiple purchasers, each purchaser does not look at their percentage interest in isolation to the other purchasers in determining whether they should withhold. Each purchaser must withhold in proportion to their percentage of the total purchase price.

Where the asset being disposed of is taxable Australian real property, the market value of all purchasers’ interests must be aggregated in examining whether the $750,000 market value threshold has been reached. If the aggregated purchase price is $750,000 or more, each purchaser must withhold in proportion to their percentage of the total purchase price.

Multiple vendors

If multiple vendors are disposing of an asset, the total market value of the asset determines whether withholding is required by the purchaser.

If the purchaser has not been provided with a clearance certificate, vendor declaration or a variation from any of the vendors, the purchaser must withhold 12.5% of the purchase price. The amount of withholding will be in proportion to each vendor’s interest in the asset.

Where one (but not all) of the vendors provides a clearance certificate or vendor declaration to the purchaser, the withholding obligation still applies as there is still a foreign resident vendor to the transaction. The amount of withholding is still on the entire first element of the cost base of the asset, not just the portion that is attributable to the relevant foreign resident vendor’s interest in the asset.

We recognise that in this situation, any vendors that are subject to the withholding would apply for a variation to ensure that the withholding amount better reflected the foreign resident vendor’s tax liability. They would receive a reduction in the withholding rate accordingly.

To reduce the need for vendors to apply for variations in these situations, our approach is that where there are multiple vendors, the purchaser may withhold in accordance with each vendor’s proportional interest in the purchase price, subject to any clearance certificate, vendor declaration or vendor variation being provided prior to settlement.

The following situations are from the perspective of a purchaser who is deciding what to do in terms of withholding. In all instances it is assumed the purchase price is $750,000 or more.

 

 

Multiple properties in one transaction

A vendor may be disposing of multiple properties in one transaction, the combined value of which exceeds $750,000. The withholding is based on the market value of a property being disposed of – not a combination of all the properties being disposed of.

The withholding is not an additional payment on top of the agreed purchaser price

The obligation for the purchaser to withhold an amount and pay it to us is not an additional payment on top of the agreed purchase price. The withholding amount is taken from the amount of purchase price that the purchaser has agreed to pay the vendor.

A purchaser that withholds in accordance with their Australian income tax obligations is protected by sub-section 16-20(2) of Schedule 1 of the Taxation Administration Act 1953. This discharges the purchaser from their liability to pay this part of the total purchase price directly to the vendor.

When withholding is required

Withholding is not required from deposits paid on signing of the contract. No payment is required when the purchaser signs the contract and pays the deposit. The purchaser is not required to pay the Commissioner until the day the purchaser becomes the owner of the asset, that is, on settlement.

If payments are to be made in multiple instalments across the contract period, withholding should only occur when the final payment is made at settlement. The withholding amount is still calculated using the full purchase price of the asset.

If the contract doesn’t settle

If for some reason the contract is not completed (settled), there is no obligation on the purchaser to withhold. This is because the purchaser has not become the owner of the asset, and therefore there is no obligation to pay an amount to us.

If the purchaser fails to withhold

If the purchaser fails to withhold when they should, a penalty may be imposed by the Commissioner which is equal to the amount that was required to be withheld and paid. General interest charges will also be applied.

Goods and services tax

Market value

The $750,000 threshold for real property is based upon the ‘market value’ of that property. Market value can be affected by the income tax law which provides that the market value of an asset at a particular time (in this case just after the transaction) is reduced by the amount of any input tax credit the purchaser is entitled to, assuming that both:

• the asset had been acquired at the relevant time
• the acquisition had been solely for a creditable purpose.

Consequently, on the basis that the parties are acting at arm’s length:

• Where a purchaser is not registered for goods and services tax (GST), or the supply of the asset is not a taxable supply, or the purchaser is not able to claim an input tax credit on the purchase, the GST-inclusive purchase price payable by the purchaser may be used as a proxy for the market value of the asset.
• Where the purchaser is registered for GST and the transaction is a taxable supply, and the purchaser is able to claim an input tax credit on the purchase, the GST-inclusive purchase price less the input tax credit may be used as a proxy for the market value of the asset.

The sale of existing 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 should calculate the 12.5% withholding by using the GST-inclusive price.

GST and the first element of the cost base

The 12.5% withholding rate is to be applied against the ‘first element of the cost base’ of the asset that the purchaser is acquiring.

However, as purchase price is understood by vendors and purchasers, and in many instances will be equal to the first element of the cost base, where the transaction is at arm’s length the purchase price may be used to determine how much to withhold.

The actual purchase price may depend upon whether or not a purchaser is registered (or is required to be registered) for GST. The following should be taken into account:

• Where the purchaser is registered for GST and the transaction is a taxable supply, and the purchaser is able to claim an input tax credit on the purchase, the first element of the cost base can be reduced by the amount of any GST net input tax credits (that is, GST the purchaser can claim back) included in the cost.
• Where a purchaser is not registered for GST or the supply of the asset is not a taxable supply, or the purchaser is not able to claim an input tax credit on the purchase, the purchaser does not make any adjustment; the GST is included in the first element of the cost base.

The sale of existing 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, you cannot claim input tax credits on that acquisition, even if you are registered for GST and intend to use the purchased property for a creditable purpose. GST-registered purchasers should calculate the 12.5% withholding by using the GST-inclusive price in the first element of the cost base.

Paying the ATO

The purchaser must pay the required amount to us on or before the day they become the owner of the property.

No withholding and payment obligation arises if the contract falls through and change in ownership does not occur.

In recognition of the practicalities of making payment at settlement, we will allow a short period after settlement to receive payment before imposing general interest charges and initiating recovery action.

How to pay

The purchaser can pay using any of the following methods:

• Electronic funds transfer – transfer the amount via EFT to
  • Bank: Reserve Bank of Australia
    BSB: 093 003
    Account number: 316 385
    Account name: ATO direct credit account
    Reference: Your payment reference number.
   
• In person at any Australia Post outlet
  • The purchaser will need the payment slip and barcode supplied to them after lodging the Foreign resident capital gains withholding purchaser payment notification. Australia Post accepts cheques up to $100 million.
   
• Mail a cheque with your payment reference number (the payment slip is helpful but not compulsory) to us at
  • Australian Taxation Office
    Locked Bag 1936
    ALBURY  NSW  1936
    AUSTRALIA.
   

Notifying us about payment

When an amount is withheld, all purchasers involved in the sale must complete a Foreign resident capital gains withholding purchaser payment notification form (NAT 74884). Where there are multiple purchasers one form can be used if there are 10 or fewer purchasers or purchasers can lodge a form individually. The purchaser (or purchasers) needs to provide the details of the vendors and the asset in their application.

To access the form and instructions, visit ato.gov.au/FRCGW.

Once a payment notification form is processed, a payment reference number (PRN) will be issued, along with a PDF icon that can be clicked on to obtain a downloadable payment slip and barcode to use at Australia Post.

Only one PRN is issued per purchaser payment notification form, even if multiple purchasers are supplied on the form.

The full payment can be made using the PRN or payment slip provided. Where two or more purchasers are included in the transaction, they can choose to make separate payments and use the same PRN or payment slip.

The payment notification form may allow the purchaser to quote the vendor’s tax file number (TFN) if the vendor has provided one. Under the law, purchasers may collect TFNs from foreign residents (where they have them) and provide them to us. This will assist us with matching withholding payments to specific foreign residents.

We encourage you to submit your payment notification form to us as early as possible to ensure you have your PRN at settlement.

What happens after payment has been made

A receipt from either Australia Post or us is proof that the purchaser has made the payment and fulfilled their obligations.

A payment confirmation email or letter will be sent to the nominated contact on the purchaser payment notification form. Confirmation will be sent by email if an email address is provided in the Foreign resident capital gains withholding purchaser payment notification form. Otherwise it will be mailed to the address of the contact.

Vendors will need a copy of the payment confirmation and use this information to claim a credit for the withholding amount when completing their income tax return.

Leases

A lease is a CGT asset that is taxable Australian real property. Therefore, the acquisition of a lease from a foreign resident vendor with a market value of $750,000 or more would be subject to the 12.5% withholding, unless the lessor provided the lessee with a clearance certificate.

However, the withholding obligation only arises with respect to any lease premium paid by the lessee to acquire the lease, as they form part of the first element of the cost base of the lease.

A lease that does not 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.

Withholding tax credits and refunds

Withholding tax credits

A foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income and including any capital gain from the disposal of their asset. The vendor will claim a credit for any withholding amount paid to us by the purchaser in their tax return.

The availability of a credit to a foreign resident is contingent on the purchaser paying the amount to us. A credit does not arise merely because an amount has been withheld.

A foreign resident vendor disposing of Australian property to which these withholding tax rules apply should apply for a tax file number (TFN) before they lodge an Australian tax return. This will ensure they can claim a credit for the amount withheld and paid to us by the purchaser.

In certain circumstances, an early income tax return may be submitted. If a foreign resident vendor is not eligible to submit an early income tax return, they must wait until the end of the financial year to do so. However, they will receive a tax credit for the withholding paid by the purchaser.

Refunds

We may refund an amount incorrectly withheld and paid by the purchaser. The vendor can't claim a refund from the purchaser.

The FRCGW amount has not been incorrectly withheld where either:

• the vendor is entitled to a clearance certificate or variation and didn't obtain one
• the vendor obtained a clearance certificate or variation but didn't provide it to the purchaser at or before settlement.

Vendors who don't provide a clearance certificate or variation to the purchaser at or before settlement will need to lodge a tax return and claim a FRCGW credit for the withheld amount. A credit for the amount withheld for foreign resident capital gains is applicable to the year the contract was signed. Therefore, it may take some time before the vendor can lodge the tax return to declare the capital gain, be assessed and then given any applicable refund for the amount withheld.

Penalties for non-compliance

Under this measure, the purchaser must both withhold and pay that withholding to us, even if they use representatives to assist them in the process.

Administrative penalties apply for failure to adhere to the foreign resident capital gains withholding legislation.

The offence provision for failing to withhold also applies.

A general interest charge is imposed for amounts not paid to us by the required date.

It is an offence to falsely claim a credit.

The law imposes penalties of up to 120 penalty units for declarations or purported declarations that are false or misleading.

Glossary

Indirect Australian real property interest

Where two tests are satisfied: the non-portfolio interest test, and the principal asset test. Indirect Australian real property interest includes shares in a company or units in a trust.

Knowledge condition

Where the purchaser knows, or has reason to believe, that the vendor is a relevant foreign resident.

Non-final withholding tax

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.

Non-portfolio interest test

An interest held by an entity (the holding entity) in another entity (the test entity) is a non-portfolio interest if the sum of the membership interests held by the holding entity (and their associates) in the test entity is 10% or more.

The test is satisfied if the membership interest is a non-portfolio interest at the time of the transaction, or through a 12-month period in the last 24 months leading up to the transaction.

Relevant asset (also referred to ‘assets that the law applies to’ in this guide)

This is taxable Australian real property, an indirect Australian real property interest, or an option or right to acquire such property or such an interest.

Relevant foreign resident vendors (also referred to as ‘vendors that the law applies to’ in this guide)

The vendor is a relevant foreign resident if one or more of these scenarios apply:

• The purchaser knows the vendor is a foreign resident.
• The purchaser reasonably believes the vendor is a foreign resident.
• The purchaser does not reasonably believe the 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 or maintained on their behalf, about the transaction)
  • the vendor authorises provision of a related financial benefit to a place outside Australia (whether to the vendor or to anyone else).
   
• The vendor has a connection outside Australia of a kind specified in the regulations.

Principal asset test

This is used to determine if an entity’s underlying value is principally derived from Australian real property.

A membership interest in an entity passes the principal asset test if the sum of the market values of the entity’s assets that are taxable Australian real property exceeds the sum of the market values of the assets that are not.

Taxable Australian real property

This 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.

More information

For more information and forms, visit ato.gov.au/FRCGW.

Legislation and supporting materials

• Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (Act No. 57 of 2017)External Link – received royal assent on 22 June 2017
• Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016External Link – received royal assent on 25 February 2016

Law companion rulings

The following rulings describe how we apply the law:

• Foreign resident capital gains withholding regime: the Commissioner's variation power
• Foreign resident capital gains withholding regime: amount payable to the Commissioner
• Foreign resident capital gains withholding regime: options

If you are a conveyancer, find out about foreign resident capital gains withholding and what it means for vendors.