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AJML Accountants Update – Jun 2022

Foreign resident capital gains withholding – part 5

When the rules apply

  • An entity (the purchaser) becomes the owner of a capital gains tax (CGT) asset as a result of acquiring it from a vendor (or vendors) under one or more transactions.
  • At least one of those vendors is a relevant foreign resident at the time at least one of the transactions is entered into.
  • The CGT asset is a certain type of Australian property or an option or right to acquire such property.
  • The purchaser acquires the CGT asset under a contract entered into on or after 1 July 2016.
  • There are no exceptions.

While the objective of the rules is to assist in the collection of foreign residents’ CGT liabilities, the withholding tax will apply regardless of whether the vendor’s gain on the sale of the asset is subject to tax under the CGT regime or as ordinary income.

The withholding obligation applies to both Australian resident and foreign resident purchasers.

Asset types

The legislation applies to the following asset types:

  • real property – taxable Australian real property with a market valueof $750,000 or more
  • vacant land, buildings, residential and commercial property
  • mining, quarrying or prospecting rights where the material is situated in Australia
  • a lease over real property in Australia if a lease premium has been paid for the grant of the lease
  • other assets
  • indirect Australian real property interests in Australian entities (that is, a membership interest of 10% or more in an entity whose underlying value is principally derived from Australian real property) – this includes shares in a company that owns land or a building erected on that land, where the ownership of the shares gives a right to occupy that land or building (that is, a company title interest in real property)
  • options or rights to acquire any of the above asset types.

Market value

In many cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, the ATO will accept the purchase price as a proxy for market value.

However, there could be circumstances where the market value is different to the stated purchase price (for example, where the vendor and purchaser are related parties and did not deal with each other at arm’s length). In such cases, the ATO will not accept the purchase price as a proxy for market value and the purchaser will need to seek a separate expert evaluation.