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The foreign resident capital gains tax withholding tax regime and its implications for SMSFs

The foreign resident capital gains tax (CGT) withholding tax system, implemented under the Tax and Superannuation Laws Amendment (2015 Measures No 6) Act 2016, has been in effect from the amended date of 1 July 2017.

Even though it has been called a foreign resident withholding system, it actually applies to all vendors. However, the end objective is that the withholding tax only applies on sales by foreign residents.

The regime applies to the sale of certain direct and indirect interests in Australian real property. These assets are referred to as taxable Australian real property (TARP), as well as, for example, shares in companies where TARP is more than half of the company’s assets. It applies to all TARP with a market value of $750,000 or more.

The purchaser is required to withhold 12.5 per cent of the purchase price and then remit the amount to the ATO. To avoid the purchaser having to withhold, the vendor must either provide a clearance certificate or a ‘declaration’.

Clearance certificates are issued by the ATO and give purchasers certainty that they don’t have to withhold either because the vendor is a resident of Australia or the shares, et cetera, are not relevantly ‘land rich’. This type of ‘clearance’ is mandatory for direct interests in Australian real property and is required prior to settlement.

A ‘declaration’ is required for indirect interests in Australian real property.

You may wonder why this is applicable as the parties are usually the same on both sides of the equation and there is no monetary consideration

Julie Dolan

It is also important to note this regime applies regardless of whether the vendor’s gain on the sale of the asset is subject to tax under the CGT regime or as ordinary income.

The ATO website provides instructions on how to complete the form. For trusts and superannuation funds, it is the entity that has the legal title that applies for the clearance certificate. Therefore, it is the trustee as individuals or a company that would need to apply. In relation to individual trustees, their tax file number (TFN) is required as the identifier. For companies that do not have a TFN, that is, most SMSF corporate trustees, it is recommended to include, as an attachment, the Australian company number (ACN), as well as details of the underlying trust.

In relation to SMSFs, not only does the regime apply to the direct purchase or sale of TARP, it can also apply to the transfer of property. Following are a few examples of how this regime could apply to the transfer of property (assuming the market value of the property is $750,000 or more):

  • a transfer in specie of business real property by a member to an SMSF trustee. The SMSF trustee becomes the owner of the property at this time, even if the transfer is for no valuable consideration,
  • a lump sum payment in specie of residential property from an SMSF trustee to a member, and
  • the transfer of property from a retiring SMSF trustee to a new individual or corporate trustee or to the continuing individual trustee(s).

This regime also applies to the common situation where a limited recourse borrowing arrangement (LRBA) has been repaid and the trustee of the custodian trust wishes to transfer the asset to the SMSF.

Under the withholding regime, the purchaser, that is, the SMSF, must withhold 12.5 per cent of the purchase price if the value of the property is $750,000 or more, unless the vendor, that is, the trustees of the custodian trust, provides a clearance certificate prior to settlement.

You may wonder why this is applicable as the parties are usually the same on both sides of the equation and there is no monetary consideration. It still applies and, as such, should the value of the property be $750,000 or more, it is imperative the trustee of the custodian trust provide a clearance certificate prior to settlement of the transfer. Otherwise the trustees of the SMSF are obligated to withhold 12.5 per cent of the purchase price and remit to the ATO.

To apply for the clearance certificate, the trustees must complete an online form with the ATO, which can take up to 28 days to process and receive. Therefore, it is important to leave sufficient time so that it does not cause issues with settlement.

Various penalties apply for non-compliance with this withholding regime. These include administrative penalties in relation to clearance certificates where a person makes a false or misleading statement in connection to the tax commissioner and penalties for failing to withhold. Failing to withhold is an offence of strict liability. This means the potential withholder will be liable even if the action was unintentional.

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