Another Lesser Known Change to Tax Rulings
3 August 2017
Following on from my colleague Kevin Higgins’ recent article, Outstanding Tax Liabilities May Impact Credit Rating, there is a recent and lesser known change to the tax rulings which we feel could well be another “Nudge” by the ATO to change current behaviours.
In May this year the Government announced changes to the Foreign Resident Capital Gains Withholding ruling. This had only been in place since 2006 and it applied to any sale of Capital Gains Tax eligible property. In essence where a Foreign Resident sells assets above a certain value they should request a Tax Clearance Certificate from the ATO prior to the sale occurring. In the event that a Certificate is not available at settlement, then the onus falls back on the purchaser to set aside the withholding.
The previous disclosure levels were for sales in excess of $2 million value and with a 10% withholding, but since 1st July the limits are now down to $750,000 and a withholding of 12.5% of sale proceeds and accordingly a lot more transactions will get caught up in this ruling. Seems simple enough…
However, consider this – since most purchasers will not be in a position to ascertain whether the Vendor is a Foreign Entity or represents a Foreign Entity, the simplest thing will be for the Legal Advisors to insist that the Vendor provides a Tax Clearance Certificate prior to settlement. In fact we understand Law Societies are now including this as a standard clause in the terms of most Sale Contract Templates.
Whilst originally established to assist in the collection of foreign residents’ CGT liabilities, the indirect consequence of the above will be that the ATO is now going to get advance warning of any proposed asset sales in excess of $750,000. We suspect that Vendors who have considerable outstanding Tax obligations and arrears that are not in arrangement, could find themselves getting a tap on the shoulder or possibly having Garnishee Notices being issued against those assets.
We strongly urge Business owners, Directors and Senior management to seek the right professional and Legal advice prior to embarking on significant asset sales or purchases that are subject to Capital Gains. We reemphasise the point that Businesses who are proactive with their communication with the ATO are unlikely to be affected by these changes.
Early intervention is the key to managing and avoiding this potential risk.