You have been acting for the Smith family for the past 10 years and have recommended several times that they put a succession plan into place in relation to their farming enterprise as Bob and Nancy are well into the 60’s. Family discussions finally started taking place nearly a year ago where it was agreed that Bob and Nancy would transfer 1600 acres of farmland to one of their sons Fred, in exchange for a lifetime annuity. Nancy and Bob’s other son James was to inherit a beach house in Noosaville upon the death of Nancy, and there was a cash account that would be split equally between Fred and James. Everyone seemed happy enough with the arrangement. Nancy and Bob’s wills were updated accordingly and transfers and deeds were drafted.
Two weeks ago just as the draft documents were finalised and ready for signing, James’ wife Matilda had heard that property values in Noosaville recently plummeted due to recent coastal flooding. James, who does whatever Matilda says, tells the family that he will not agree to the succession plan and will challenge Nancy and Bob’s will if they go ahead with the current succession plan.
Frustrated because you have put in a lot of effort into finalising the documents, you advise Bob and Nancy that they need to reconsider and think of a plan B. Later that day you shred the Smith succession documents and begin working on another matter.
This morning your receptionist tells you the Smith family are coming in to see you after lunch; they had apologised for the short notice but said it was the only day they could all come in together. Thinking that they had already come up with a plan B (but very surprised at how quick that was) you enter the meeting with a clean sheet of paper. James tells you that Matilda had got it all wrong, it wasn’t Noosaville that had the flooding, it was Noosa, and in fact property prices in Noosaville increased over the past few years. He said the beach house was now valued at $2.1 million, which is $50,000 less than what the farm was valued at. The family advised that they wanted to stick with the original plan and sign the documents. You race to your room, print out the documents again, the family shake hands, sign and date the documents and do all that is necessary to put the agreement into effect.
Today is 7 July 2016, seven days after the foreign resident capital gains withholding rules came into effect.
As Fred did not obtain a vendor’s clearance certificate from the vendors and failed to withhold the required 10% of the market value, a penalty will be imposed by the Commissioner which is equal to the amount that was required to be withheld and paid, and general interest charges.
The new withholding regime applies to contracts entered into on or after 1 July 2016 where the market value of the property is valued at $2m or more, in which case 10% of the sale price (in this case 10% of $2,050,000) must be withheld by the purchaser unless the vendor can provide a clearance certificate from the ATO showing they are an Australian resident on or before settlement. If the vendor fails to provide the certificate by settlement, the purchaser must withhold 10% of the purchase price/market value and pay this to the ATO. In other words, the vendor is deemed to be a foreign resident unless they can provide a clearance certificate.
Vendors can apply for a clearance certificate at any time they are considering the disposal of real property. The clearance certificate can be ordered on line from the ATO website and is valid for 12 months. It is important to note that it is not just real estate sales the new rules apply to; it appears to apply to any land transfer where the land is valued at over $2m. It is unclear at this stage whether the Commissioner has any discretion in relation to the penalty for noncompliance.
You feel like a goose because you have just done weeks of training on the withholding regime and in the rush, didn’t consider it in the Smith family matter.
By Michaela Schmidt
This article is general information only and should not be relied on without obtaining further specific information.