Following the Foreign Investment Review Board’s (FIRB) updated foreign investment policy (effective 1 December 2015), which coincided with the introduction of mandatory fees for foreign investors, the Treasurer of the Commonwealth of Australia announced on 22 February 2016 new conditions for all foreign investment applications in Australia to ensure that companies, and their ‘associates’ (as defined in section 318 of the Income Tax Assessment Act 1936 (Cth)), investing in Australia pay tax on their Australian earnings.
Foreign investment into Australia requiring FIRB approval will only be permitted where it passes the ‘national interest’ test (in light of factors such as national security, the impact of competition, the character of the investor, and the impact on the economy and community). The new taxation conditions on foreign investment do not represent a change in the law, but rather increase the focus on taxation and add to the ‘national interest’ test (that is, foreign investors must comply with the new taxation conditions in order to satisfy the ‘national interest’ test). The new taxation conditions include the following:
- the applicant and its associates must comply with Australia’s taxation laws;
- the applicant and its associates provide information or documents required by the Australian Taxation Office (ATO) in connection with the application;
- the applicant and its associates must notify the ATO of any material transactions or other dealings to which transfer pricing rules in the Income Tax Assessment Act 1997 (Cth) or anti-avoidance rules in the Income Tax Assessment Act 1936 (Cth) may apply (if not already previous notified);
- the applicant and its associates must pay any outstanding taxation debts; and
- the applicant must provide an annual report to FIRB on compliance with the taxation conditions.
Where significant tax risks are identified, further conditions may also apply, including:
- the applicant must engage in good faith with the ATO to resolve any tax issues (for example, negotiation of an advance pricing arrangement or seeking a ruling from the ATO);
- the applicant must provide information to the ATO on a periodic basis (for example, a forecast of tax payable).
These new taxation conditions will apply prospectively. Under section 72 of the Foreign Acquisitions and Takeovers Act 1975 (Cth), the new conditions appear to commence for all applications being considered or received after 22 February 2016.
Failure to comply with these taxation conditions may be very significant to a foreign investor and could result in prosecution, fines and potentially forced sale of assets.
Foreign investors should ensure that they obtain appropriate taxation advice to ensure that they comply with the new taxation conditions and avoid unintentional breach of the new taxation conditions.
New Withholding Requirements for Purchasers of Interests in Australian Land
From 1 July 2016, purchasers of direct and indirect interests in land in Australia could potentially be subject to an additional cost of 10% of the purchase price if they fail to withhold that amount from payments made to vendors if the relevant clearance certificates or residency declarations are not provided. The new rules will apply to contracts entered into from 1 July 2016, but both purchasers and vendors will need to get ready for these changes well before any sale is executed to ensure they are not adversely affected.
The withholding provisions apply to require the purchaser to pay to the Commissioner of Taxation (Commissioner) an amount equal to 10% of the purchase price (including the money paid and the market value of any property given) of the asset on or before becoming the asset owner for assets acquired from a non-resident which are:
- Taxable Australian Real Property (TARP) such as land, fixtures, mining tenements in Australia;
- indirect Australian real property interests (for example more than 10% of the shares in a company where 50% or more of the assets of the company are TARP); or
- an option or right to acquire TARP or indirect Australian real property interests.
There are a number of exceptions and exemptions, and the procedures are quite different for direct and indirect real property interests.
Direct Australian Real Property Interests (TARP)
The withholding provisions apply to real property located in Australia including a lease of land, mining, quarrying or prospecting rights in Australia, and include fixtures to the land and options or rights to acquire real property. This can include real property sold as part of the sale of a business, or the sale or grant of leases. Company title interests also fall under this category (even though technically they are indirect interests in land).
A vendor will be assumed to be a non-resident unless they supply a clearance certificate to the purchaser prior to settlement which has been issued by the Commissioner certifying that they are an Australian resident. In order for a vendor to obtain a clearance certificate they may be required to ensure all their tax returns are up to date. Clearance certificates will be valid for 12 months, so it is recommended that any vendors intending to sell property apply for a clearance certificate well before the proposed settlement date. If there are a number of vendors, a clearance certificate must be obtained for each.
There are a number of exceptions from the withholding provisions:
- Where the value of the land is less than AU$2 million (where there are multiple purchasers it is the total value of the land, not just the purchaser’s interest);
- Where every vendor has supplied a clearance certificate;
- Where the vendor is a company under administration or the transaction is part of the administration of a bankrupt estate or an arrangement with creditors; or
- Where another withholding obligation applies to the transaction.
If the vendor is not able to provide a clearance certificate, the purchaser must pay 10% of the purchase price to the Australian Taxation Office (ATO) unless they receive a variation certificate issued by the ATO before settlement. The vendor can apply for a variation certificate if they believe the actual tax payable in respect of the sale will be less than 10%, such as if they have carried forward tax losses, or if there are multiple vendors with only one being a non-resident. A secured creditor can also apply for a variation certificate if they consider the proceeds of sale will be insufficient to discharge the debt as well as pay the Commissioner. In each case a variation will only be effective if it is provided to the purchaser.
Indirect Real Property Interests
There are also withholding provisions which apply to indirect Australian real property interests such as shares in a company or units in a trust where an interest of 10% or more is held in an entity where 50% or more of the assets of the entity are Australian real property. The potential exceptions from withholding for indirect interests in real property are quite different from direct interests. The AU$2 million threshold does not apply to indirect interests in real estate, so interests of any value are potentially caught. However there is no need for a vendor of indirect interests to provide a clearance certificate as residency can be established in other ways.
There are a number of exceptions from the withholding provisions for indirect interests, for example where:
- the vendor has made a declaration that they are an Australian resident;
- the vendor has made a declaration the assets are not indirect Australian real property assets;
- the purchaser has reasonable grounds to believe every vendor is an Australian resident (the ‘knowledge condition’);
- a variation certificate has been provided to the purchaser prior to settlement (by either the vendor or a secured creditor as outlined above) and the variation reduces the withholding payment to nil;
- the transaction is conducted through an approved stock exchange or crossing system;
- the transaction is a securities lending arrangement;
- the vendor is a company under administration or the transaction is part of the administration of a bankrupt estate or an arrangement with creditors; or
- an amount is already required to be withheld as withholding tax for some other reason.
Payments to the ATO
In the case of both direct and indirect interests of property, the purchaser may withhold the required amount from the purchase price payable to the vendor. However if the purchaser fails to withhold, the obligation to pay to the Commissioner still exists and the purchaser may be liable for an administrative penalty and interest costs. These rules therefore place onerous obligations on the purchaser.
A purchaser is entitled to rely on a vendor’s declaration of residency or declaration that the interest is not an indirect real property interest unless they know the statement to be incorrect. They are able to rely on the declaration even if they have grounds to doubt the accuracy of the declaration unless they have specific knowledge that the statement is false.
The vendor may however be liable for penalties if the statements made are false or misleading.
This legislation raises a large number of important issues for purchasers, vendors and secured creditors. These include:
- All vendors who are considering selling direct interests in land which could have a value over AU$2 million should consider whether their tax affairs are in order and apply for a clearance certificate well before the proposed settlement date.
- Vendors of shares or units in trusts should consider whether the stake would constitute an indirect real property interest in order to determine whether they were able to make an appropriate declaration to avoid having tax withheld.
- If the vendor is not able to obtain a clearance certificate or make a relevant declaration, they should consider whether they would be entitled to a variation of the amount of tax withheld. They should allow plenty of time prior to settlement to obtain the variation certificate.
- Secured creditors who become aware of a proposed sale should consider whether they should seek a variation certificate.
- Purchasers of direct real estate need to ensure that a clearance certificate is provided on or before settlement.
- Purchasers should ensure the appropriate declarations are included in all contracts of sale of indirect interests in land.
- If the purchaser is required to pay an amount to the ATO, they will need to ensure that they have sufficient funds available to make the payment at settlement (this is particularly relevant if the acquisition is made for non-cash consideration), and they complete an online “Purchaser Payment Notification” form on or before settlement.