(01.04.2016) Beware of CGT Law Change: Withholding Regime to Apply from 1 July 2016

The Federal Parliament has passed laws which introduce a capital gains withholding regime for contracts entered into on or after 1 July 2016.

Generally speaking, the laws mean that where a foreign resident disposes of certain property, the buyer will be required to withhold 10.00% of the purchase price and pay that amount to the Australian Taxation Office (“ATO”). If the seller has first, however, obtained a “clearance certificate” from the ATO prior to settlement, then there is no need for such a withholding to be made.

I’m Not a Foreign Resident: Why is this Relevant?

Whilst at first glance it would appear that the regime will only affect foreign residents who are selling property, it may also affect buyers and Australian resident sellers, because:

  1. IMPORTANTLY: Australian resident sellers of property with a market value of $2 million or more will also need to apply to the ATO for a clearance certificate and provide this to a purchaser before settlement to ensure that no funds are withheld from sale proceeds;
  1. Contracts of sale may need to contain appropriate terms such that settlement is conditional on a clearance certificate being issued before settlement; and
  1. Parties who are entering into a vendor-finance arrangement (whereby the seller loans the purchase price to the buyer) will need to be made aware of what, if any, impact the withholding regime may have on their cash-flow.

Which Types of Assets are Affected?

The following types of property will be affected:

  1. Real property in Australia, including land, buildings, residential & commercial property;
  2. Lease premiums paid for the grant of a lease over real property in Australia;
  3. Interests in Australian entities whose majority assets consist of the above property or interests (i.e. an “indirect interest”); and
  4. Options or rights to acquire the above property or interest.

As mentioned above, the new regime will not apply to transactions where the market value of the property is less than $2 million.

ATO Processing Times?

CGTThe ATO has published information on its website about the new regime and, importantly, anticipated processing times for clearance certificates. The information can be viewed here.

The ATO has stated that in straightforward cases, where it has all the required information, it is expected that clearance certificates will be provided within days of being submitted. However, where there are data irregularities or exceptions, longer processing time of 14 to 28 days (or more) may be required.

We would suggest that parties approach the above processing times with significant caution, given problems which have previously plagued the ATO’s online processing systems, as well as teething issues which first affected other government systems, including the PPSR & ASIC Portal.

Get the Jump on Your Certificate Application

If you are thinking of selling your property you can “get the jump” on your application for a clearance certificate so that it is obtained well before your property is sold.

This is because a seller can apply for the certificate at any time they are considering the disposal of their property, including before a property is listed for sale. A certificate is valid for 12 months and must be valid at the time a transaction is entered into.

Should you be concerned about how the new laws will affect you, or simply wish to discuss a conveyancing matter generally, please feel free to contact one of our lawyers for a consultation today on (07) 4616 9600, or via our contact page.