1 July 2017 start for significant changes to the Foreign Resident CGT Withholding Tax regime - are you ready?

23 Jun 2017

If you're involved in transactions concerning Australian land, you need to factor in changes to the Foreign Resident CGT Withholding Tax regime (FRWT Regime) which come into effect on Saturday, 1 July 2017.

The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (Cth) will:

  • increase the rate of withholding from 10% to 12.5%; and
  • reduce the "property value exclusion" threshold for direct acquisitions in Australian land from $2m to $750k.

The FRWT Regime, which commenced 1 July 2016, can impose broad obligations on parties to transactions involving direct and indirect (ie. through acquisitions in majority Australian landholding companies and trusts) acquisitions in Australian land even where all the parties are Australian residents, and it can apply to the granting of options in respect of Australian land

Importantly, the "property value exclusion" only applies to direct acquisitions in Australian land, and not to indirect acquisitions or the granting of options (but it can apply to the subsequent transfer of the subject land on exercise of an option). Consequently you can still have obligations under the FRWT Regime on:

  • the indirect acquisition of an interest in a majority Australian landholding company or trust even where the underlying Australian landholdings are less than the "property value exclusion" threshold; or
  • the granting of an option in respect of Australian land even if the subsequent acquisition on exercise of the option would fall within the "property value exclusion".

At the same time that the Federal Government announced the above changes in the most recent Federal Budget, it also flagged that the test for determining indirect interests in Australian real property would be modified. If implemented, this would potentially broaden the transactions involving indirect acquisitions in Australian land which could be affected by the FRWT Regime. However, the legislation dealing with this proposed measure has yet to be introduced.

Given the broad reach of the FRWT Regime, all parties to transactions involving direct and indirect acquisitions in, and the granting of options in respect of, Australian land, including freehold / leasehold and mining, quarrying or prospecting rights, should seek specialised advice on their obligations under the FRWT Regime.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.