Deceased Estates Relieved From Foreign CGT Withholding Tax

Earlier this year, the Federal Government introduced a compulsory withholding tax scheme for transactions involving the transfer of Australian real property (e.g. residential and commercial land, buildings and leases). The intention of this scheme is to assist with the collection of capital gains tax payable by foreign residents.

1. How does the CGT withholding scheme work?

Under the scheme, any acquirer of Australian land needs to pay 10% of the value of the property (usually the purchase price if parties are unrelated and dealing at arm’s length) to the Australian Taxation Office (‘ATO’) before acquiring the property if:

  • the value of the property is $2 million or more;
  • the transferor does not prove that they are not a foreign resident by providing to the acquirer a Clearance Certificate issued by the ATO, which is valid for 12 months; and
  • a party has not successfully applied to the ATO to have the withholding amount varied (e.g. when there is a capital loss expected or where only one of multiple transferors is a foreign resident).

In other words, unless the transferor provides the acquirer with an ATO Clearance Certificate, the acquirer must pay the withholding amount to the ATO regardless of whether the transferor is actually a foreign resident. Interestingly, the obligation to pay the 10% withholding amount falls on the acquirer of the property rather than the owner or transferor. This means that an acquirer of property is liable for penalties and interest should they fail to pay the ATO the required amount before they acquire the property.

2. How does the scheme affect the administration of deceased estates?

An unintentional result of the scheme is that it required personal representatives (i.e. executors and administrators) and beneficiaries who acquired property worth at least $2 million from a deceased person to pay the ATO 10% of that value.

It therefore comes as welcome relief that the Deputy Commissioner of Taxation has recently issued a determination that the withholding amount is automatically varied to nil where, as a result of the death of an individual:

  • the personal representative acquires property following the death of the individual;
  • a beneficiary obtains ownership of the property by way of direct transfer from the deceased or by transfer from the personal representative; or
  • a surviving joint tenant acquires the deceased joint tenant’s interest in the property.

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