Private ruling: Foreign resident capital gains withholding regime
Date of advice: 6 September 2017
Published: January 2018
Ruling period: Year ending 30 June 2018
Date scheme commenced: 1 July 2017

Ruling: Q1: Does Subdivision 14-D of Schedule 1 to the Taxation Administration Act 1953 (TAA) apply to the contract of sale between Company A and Company B? | A1: No | Q2: Does Company B have an obligation to pay the withholding amount to the Commissioner of Taxation (the Commissioner) in accordance with subsection 14-200(1) of Schedule 1 to the TAA? | A2: No | Q3: Does Subdivision 14-D of Schedule 1 to the TAA apply to the contract of sale between Company B and Purchaser X? | A3: Yes

Relevant facts and circumstances: The Property is owned by two Registered Proprietors. The Registered Proprietors entered into a contract of sale dated early 2014 to sell the Property to Company A for the purchase price of over $2 million (Head Contract). By contract of sale dated in early 2016, Company A agreed to sell the Property to Company B for the purchase price of over $2 million (Sub-Head Contract). Company B is negotiating to sell the Property to Purchaser X for the purchase price of over $2 million plus GST (Proposed Contract). The Proposed Contract may be signed before or after 1 July 2017. The Head Contract, the Sub-Head Contract and the Proposed Contract will settle on the same day. An order was made in mid 2017 under Subsection 69(2) of the Foreign Acquisition and Takeover Act 1975 (Order) that Company A’s acquisition under the Head Contract was contrary to national interest and ordered to dispose of its interest in the Property by midnight 11 months from date the Order commences. The Order demonstrates that Company A is a foreign purchaser.

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

Reasons for decision: Summary: Subdivision 14-D of Schedule 1 to the TAA outlines the foreign resident capital gains withholding regime (the Regime). The Explanatory Memorandum to the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 (the EM) provides that the effective date of the Regime is 1 July 2016. 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) 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. Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 amends the TAA to modify the Regime to: increase the withholding rate from 10 per cent to 12.5 per cent; and reduce the withholding threshold from $2 million to $750,000. The measure will apply in relation to acquisitions of property that occur on or after 1 July 2017. Subsection 14-200(1) of Schedule 1 to the TAA provides that the withholding obligation under that section arises unless an acquisition under a transaction under section 14-200(1)(a) is excluded under section 14-215. | Detailed Reasoning - Application to your circumstances: The contract between Company A and Company B was entered into before 1 July 2016. Moreover, the Order does not create a new contract date since they are not party to the contact of sale and have allowed 11 months for the disposal to occur. Accordingly, Subdivision 14-D of Schedule 1 to the TAA does not apply; Company B does not have an obligation to pay the withholding amount to the Commissioner. As Company B disposal contract will be entered into after 1 July 2016, Subdivision 14-D of Schedule 1 to the TAA will apply.