Private ruling: Foreign resident capital gains withholding - purchaser withholding
Published: September 2017
Ruling period: Year ending 30 June 2017
Date scheme commenced: 1 July 2016

Ruling: Q2: If the purchasers have an obligation to pay the withholding amount to the Commissioner in accordance with section 14-200 of Schedule 1 to the TAA will the 10% withholding amount be calculated on the purchase price of the CGT asset? Answer: Yes

Relevant facts and circumstances: A property, which is taxable Australian real property is currently owned as follows: (a) Two individuals (A and B) as joint tenants with ½ interest; and (b) Two other individuals (C and D) as joint tenants with ½ interest A and B, together with C and D currently own the property as tenants in common in equal shares. The purchasers (X and Y) entered into a put and call option deed before DDMMYYYY with A and B in relation to the sale and purchase of their half interest in the property. X and Y are the children of C and D. C and D are not selling their half interest in the property and will remain the registered owners of their half share. X and Y will exercise the call option under the option deed before DDMMYYYY and together will purchase A and B's one half interest in the property. The purchase price for A and B's half interest in the property is under $X. The purchasers are only purchasing a one half interest in the property. A and B are both foreign residents. The Market value of the entire 100% interest in the property is over $X.

Relevant legislative provisions: Subdivision 14-D of Schedule 1 to the Taxation Administration Act 1953

Reasons for decision: Summary: Section 14-200 of Schedule 1 to the Taxation Administration Act 1953 (TAA) outlines the foreign resident capital gains withholding regime. From 1 July 2016, purchasers of certain Australian assets are obliged to withhold 10 per cent (or an amount varied to a lesser percentage under section 14-235 of Schedule 1 to the TAA 1953 of the purchase price of the asset on settlement where they have purchased the property from a foreign resident, and to remit this amount to the Commissioner of Taxation (the Commissioner). Subsection 14-200(1) of Schedule 1 to the TAA 1953 provides that you must pay the Commissioner an amount if you purchase taxable Australian real property and if you know that at least one of the vendors at the time that the sale contract is entered into is a foreign resident, unless the acquisition transaction is excluded under section 14-215 of Schedule 1 to the TAA 1953. Subsection 14-200(2) of Schedule 1 to the TAA 1953 provides that you are not required to pay the Commissioner an amount if the entity provides you with a clearance certificate issued by the Commissioner under Subsection 14-220 (1) of Schedule 1 to the TAA 1953 which covers the period that the transaction is entered into and the asset is Australian real property. Section 14-215 of Schedule 1 to the TAA 1953 sets out the kinds of transactions that are excluded, and paragraph 14-215(1)(a) of Schedule 1 to the TAA 1953 specifies that an acquisition of a CGT asset is excluded if just after the transaction the CGT asset is Australian real property with a market value of less than $2 million. Subsection 14-215 (2) of the TAA 1953 provides for the purposes of paragraph 14-215(1)(a) of Schedule 1 to the TAA 1953 if the CGT asset is an interest in real property and just after the transaction there are one or more similar interests in the same property the market value of the CGT asset just after the transaction includes the market value of each of those similar interests. Paragraph 14-215(2)(b) of Schedule 1 to the TAA 1953 operates to include both separate interests in the property. The operation of the Act does not distinguish between the separate ownership interests in the asset and includes the market value of all interests when determining the cost base of the CGT asset. As such the withholding will apply where the market value of the whole property is over $X. As the market value of the property is over $X the acquisition of the property is not an excluded transaction in accordance with section 14-215 of Schedule 1 to the TAA 1953. | Detailed Reasoning - Application to your circumstances: As the vendors are both foreign residents, and the property is Australian real property with a market value of more than $X, you have an obligation to withhold and pay the withholding amount in accordance with section 14-200 of Schedule 1 to the TAA 1953. | Detailed Reasoning - The amount to be paid to the Commissioner: Subsection 14-200(3) of Schedule 1 to the TAA 1953 provides that the withholding amount to be paid to the Commissioner is an amount equal to 10% of the first element of the CGT assets cost base for the purchase just after the acquisition (usually the purchase price), less any payment amount you made for the option, unless the withholding amount is varied under section 14-235. The total withholding required under subsection 14-200(3) of Schedule 1 to the TAA 1953 is 10% of the purchase price of the asset, with each purchaser required to withhold the relevant portion of the 10% which represents their ownership interest in the CGT asset. With reference to the purchase price of the asset, with each purchaser withholding an amount and paying that amount to the Commissioner in accordance with their ownership interest, the total withholding is therefore 10% of the purchase price.

Question 1: Do the purchasers have an obligation to pay the withholding amount to the Commissioner in accordance with section 14-200 of Schedule 1 to the TAA?