From 1 July 2016 every person or entity who acquires land in Australia which has a value of $2 million or more must withhold money on account of the transferor’s potential Capital Gains Tax liability. The person acquiring the property is then required to remit any such amount to the ATO.
In addition, entering into an option to purchase (regardless of the value of the underlying property) and acquiring interests in certain landholding companies and trusts will also be caught by this new tax requirement.
If the transferee (ie purchaser) fails to withhold the correct amount of tax, then the purchaser will be penalised. Significant penalties will apply.
Generally, the amount to be withheld will be 10% of the purchase price or the value of the property, but this may be varied if the vendor obtains a variation notice from the ATO and serves a copy of the notice on the purchaser prior to completion of the sale.
The transferee is also not required to withhold or remit any money if an exception applies.
Accordingly, unless an exception or variation notice applies, all persons selling land or interests in land for $2 million or more must be aware that the purchaser will withhold 10% of the purchase price from completion.
Any withheld amount will be credited to the Vendors when the Vendors next lodge their tax return with the ATO.
Exceptions to the new withholding regime
There is no requirement for a purchaser to withhold any money on account of the vendor’s potential CGT liability if:
1. The market value of the property is less than $2 million; or
2. A clearance certificate has been obtained from the ATO by the vendor (or all of the vendors when there is more than one vendor) and provided to the purchaser before settlement; or
3. In relation to an option or an interest in a landholding company, the vendor gives the purchaser a declaration that the vendor is or will be an Australian resident for a period which covers the transaction (and the purchaser is not on notice of the declaration being false), or
4. The vendor is under external administration or in bankruptcy.
Who is eligible for a Clearance certificate
Australian residents are eligible for clearance certificates.
Foreign residents are not eligible for clearance certificates, but they may be able to obtain a variation notice to reduce or eliminate the need formoney to be withheld from the sale, if they can show that a CGT exemption or other exemption will apply.