Update on withholding tax

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11
Jul

Update on withholding tax

11.07.18

This article discusses final and non-final withholding taxes, and the recent changes to withholding tax on disposal of property assets in Australia that may apply to both Australian resident and non-resident tax payers.

Final withholding tax Non-residents are not required to disclose their interest, dividend and royalty income in an Australian income tax return, as final withholding tax is deducted.  The rates of withholding tax vary across the tax treaties signed with other countries and are broadly:

Tax rates for

Treaty countries

Non-treaty countries

Interest

0% - 10%

10%

Unfranked dividends

15%

30%

Royalties

15%

30%

Dividend franking credits in-excess of the withholding tax are non-refundable and cannot be carried forward for future use. Non-residents need to ensure that their Australian financial institutions (e.g. banks and share registries) have correctly recorded their non-residency and that withholding tax is being deducted from income where appropriate.

Non-final withholding tax

Non-final withholding tax is designed to encourage non-residents to disclose capital gains derived on the sale of their property assets in Australia.  From 1 July 2016, purchasers of certain commercial and residential real estate are required to withhold a non-final withholding tax from settlement payments made to non-resident vendors.  Australian resident vendors are exempt if they apply to the Australian Taxation Office (“ATO”) for a clearance certificate.

From 1 July 2018, this withholding tax, or foreign resident capital gains withholding payment (FRCGW) will now apply to more property disposals in Australia due to changes in the FRCGW rates and thresholds.  These are summarised below:

Foreign resident capital gains withholding criteria:

Contract date between 1 July 2016 and 30 June 2017

Contract date from 1 July 2017

Purchase price

$2,000,000 and greater

$750,000 and greater

Withholding tax rate

10% of purchase price

12.5% of purchase price

 The FRCGW acts as a refundable tax credit against the capital gains tax payable in the non-resident’s Australian income tax return.  For example, the FRCGW is refunded in full if a capital loss is made.  Conversely, the FRCGW is credited towards tax payable should capital gains arise.

Australian resident vendors (or their representative) should apply to the ATO for a clearance certificate prior to exchanging contracts on property sales that exceed the $750,000 threshold.  If the purchaser is not presented with a valid clearance certificate, they will be required to withhold 12.5% of the purchase price paid to the vendor (with limited exceptions).  At the latest, the clearance certificate needs to be given to the purchaser prior to settlement, however, we suggest clearance certificates to be obtained and submitted prior to contracts being exchanged.

If you think you may need to obtain a clearance certificate, or require assistance with matters pertaining to your property sale, please get in contact with your ESV engagement partner on 02 9283 1666.