Now you’re a foreign resident – unless you are not!

Here’s a scenario for you to consider:

I’m an Australian and I have just sold my family home for $2 million.

When I get my money, the purchaser tells me that I am only allowed to get $1.8 million and they have to give $200,000 to the tax office because the contract was signed after 1 July 2016.

What! Why?

What if I still owed the bank $1.9 million on my mortgage? Do I have to borrow another $100,000 to pay out the mortgage or do I let the sale fall over (and possibly get sued)?

New Capital Gains Tax Regime

Under amendments to Australia’s foreign resident capital gains tax regime, you may be deemed to be a foreign resident even if you’re not.

If you transfer an interest in land (whether domestic, commercial or vacant land) for an amount of $2 million or more, the purchaser may be required to pay 10% of the market value to the Australian Taxation Office.

The new regime has been introduced to make it easier for the tax office to recover money from foreign residents who have assets in Australia who may otherwise leave the country without paying any tax.

There are some exclusions to the liability of capital gains tax if you are a vendor. One such exclusion is in circumstance where the vendor has obtained a “Clearance Certificate” from the Australian Taxation Office (in the case of interest in land) declaring that they are not a foreign resident.

Without such a certificate, the default position is that the vendor is automatically assumed to be a foreign resident.

If you are the purchaser, you are not deemed to be a foreign resident but you might be required to complete a “Purchaser Payment Notification” form, withhold 10% of the purchase price and pay it to the tax office – effectively making you the tax collector.

But wait, there’s more.

The new system also applies to leases, mining, quarrying, or prospecting rights. There are also indirect Australian real property interests which can be caught, such as shares in a company or units in a trust where the majority of the assets are comprised of Australian land. These may attract the 10% withholding requirement if a foreign resident transfers an interest of 10% or more in the company/trust. In this case the $2 million threshold may not apply.

Practical Impact

The new withholding regime is complicated. The impact of this is that it could cause serious glitches for settlement of high-value transactions when the purchaser withholds 10% of the purchase price and sends it to the Australian Taxation Office. Especially since the purchaser/recipient is required to do this at or before settlement!

The new regime also appears to have application in less obvious ways, such as:

• The transfer of property to an executor or administrator under a deceased estate.
• The transfer of property by the executor to a beneficiary under a deceased estate.
• The transfer of property in a family law settlement or otherwise subject to court orders or binding financial agreements.
• Gifts from parents to children or other gifts.
• Transfers from trustees of a trust to a beneficiary or otherwise on change of the trustee.

WATCH OUT – in the above circumstances there is unlikely to be a payment of sums of monies but if the market value is still $2 million or more the transferor will have an obligation to pay 10% to the tax office.

If you have any questions, or if you think you may be caught by the new regime, please contact John Wardlaw (Director, Corporate Practice Group) or Natalie Fielding (Director, Family law Practice Group) on 03 9629 9629.