A withholding tax nightmare starts in 2016…

As we have looked at before, the previous government announced it was going to introduce a new non-resident withholding tax. This would apply where a taxpayer buys certain CGT assets from non-residents.

Unfortunately, late last year the current government confirmed they were going to continue with this announcement. And now they have released a discussion paper on this new withholding tax.

Just as a reminder, the government will introduce a 10% non-final withholding tax on the disposal of certain “taxable Australian property” by foreign residents. The only exemption to this is withholding will not apply to residential property transactions under $2.5 million. This is proposed to apply from 1 July 2016.

The Discussion Paper acknowledges the difficulty there may be for those who purchase CGT assets as, under the proposed rules, they will need to identify if the seller is a foreign resident and if the CGT asset is a taxable Australian property.

Given the fact that there is about 6+ residency decisions in the AAT (for example, the AAT Case [2014] AATA 335, Re Dempsey v FCT) each year, it is unreasonable to expect non sophisticated taxpayers, possibly even those who are not carrying on a business, to be able to identify if other taxpayers are non resident. The current non resident withholding tax rules apply only to income sources that will apply to sophisticated taxpayers or those in business (interest, dividends and royalties).

Therefore, a payee declaration option, as used in other jurisdictions, seems like the only reasonable outcome (and is suggested in the paper).

But if this is not used and the taxpayer is required to assess whether the taxpayer is a non resident, hopefully the new rule will allow purchasers to use the assessment done by the payee. If the payer were to ask whether the payee:

  1. Have you previously lodged a tax return with the Australian Taxation Office?
  2. If so, did you identify as a “non resident” in that return?

If the payee has lodged a tax return they have made a decision as to whether they are a non resident. If they have not lodged a return, and have been in existence for some time, they have decided they need not lodge a return, and this may be that they have not tax presence in Australia.

My “administrative” suggestion is that the payer can rely on the lodged tax returns by the payee, or can assume the payee is not a resident if they have never lodged a tax return.

But my preferred option… dump a bad policy!

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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