From 1 July 2016, purchasers, either resident or non-resident, will be required to withhold 10 percent of the purchase price of relevant Australian assets (namely taxable Australian real property (TARP) assets and indirect Australian real property interests) purchased from a non-resident vendor (subject to a number of exclusions including where direct TARP has a market value of less than $2million).
These rules place the onus for withholding on the purchaser, however, this article focuses on what vendors should be considering under the new withholding rules.
Where the relevant assets are TARP (or a company title interest), a vendor will be considered a 'non-resident' unless it can present a 'clearance certificate' to the purchaser confirming its residency status. A resident vendor will need to apply for a 'clearance certificate' as soon as possible during the sale process. Where the vendor does not undergo this process on the assumption that they qualify as 'resident', the purchaser can withhold 10 percent from the purchase price. The clearance certificate will be valid for multiple transactions for 12 months and must be valid at the time the certificate is given to the purchaser prior to settlement.
An application can also be made to vary the amount of withholding where, for example, no CGT is expected to arise or where the CGT payable is less than 10 percent of the purchase price. The timing of variation requests will be an important consideration to ensure that the variation is received before the purchaser withholds a payment.
Although the purchaser can rely on a declaration from the vendor that no TARP or indirect Australian real property interest exists, where no declaration is made and there is a difference of opinion on the status of the asset, the consequence is to reduce the consideration received by the amount of withholding tax (i.e.10 percent). This may also arise where a declaration from the vendor is out of date as the declaration is only valid for six months.
Once a purchaser has withheld tax on the purchase price, the vendor may claim the amount as a credit in its income tax return. In order to do this, the vendor should ensure they have obtained a TFN.
Clients should be made aware of the above considerations where it plans to sell assets in the future.