Do the Foreign Resident CGT Withholding rules affect your share purchase

Posted on August 24, 2016

The new Foreign Resident CGT Withholding Regime does not only affect purchasers of land.

As of 1 July 2016, if you buy an interest in a landowning entity from a seller that is a foreign resident, you may be required to withhold 10% of the purchase price, or face heavy penalties.

Are you purchasing an Indirect Real Property Interest (IRPI)?

Let’s say you have agreed to buy shares in an unlisted company, and the company owns land. If land is the company’s main asset, the seller (together with its associates) owns at least 10% of the total shares (or has done so for a 12 month period in the past 2 years) and certain other requirements are met, the shares you are buying may qualify as an IRPI.

The seller may provide you with a declaration that the shares are not an IRPI, but you may only rely on it if you do not know that it is false.

The same rules may also apply if you buy units in a trust, or an interest in a partnership, where land is a major asset of the trust or partnership.

Is the seller a foreign resident?

If you, as purchaser, know or reasonably believe the seller is a foreign resident, the seller is regarded as a foreign resident for the purposes of the Foreign Resident CGT Withholding rules. The seller may also provide you with a declaration that it is an Australian resident which, you may rely on, unless you know that it is false.

Your obligation to withhold

If the shares you are buying are an IPRI and the seller of the shares is a foreign resident, then unless an exemption applies or you apply for a variation, you must withhold 10% of the purchase price and pay it to the ATO on account of the seller’s potential liability for CGT.

Seek help

The new rules are very complex, and the penalties for a buyer who fails to comply are significant. If you come and see us early on, we can help you carry out appropriate due diligence, explain your rights and obligations, and include warranties and indemnities in your contract to protect you and reduce your risk.

Contact Ronit Tauber at [email protected] or on 9853 0311.

This bulletin is provided for general information purposes only, and should not be relied upon as a substitute for legal advice.

The information in this bulletin is current as at the date of publication