Why family law settlements in Australia must factor in the new foreign resident capital gains withholding tax
This is a new and complicated area of law that will affect a large number of property settlements. The foreign resident capital gains withholding tax regime applies to contracts entered into on or after 1 July 2016, relating to certain assets. The purpose is to assist in the collection of foreign residents’ Australian tax liabilities.
However not everyone is aware this has implications for family law property settlements, even when both parties are Australian taxation residents. This is because of the presumption that the vendor is a non-resident unless they have obtained a clearance certificate prior to settlement.
Take real property as an example. When the real property has a value of two million dollars or more, unless the vendor has obtained a clearance certificate prior to settlement the purchaser must:
• withhold 10% of proceeds
• register for withholding tax
• pay the withholding tax to the Australian Tax Office (ATO).
So let’s look at a simple family law example:
• The husband owns a house worth three million dollars.
• Both the husband and wife are Australian taxation residents.
• As part of the property settlement, the husband transfers his interest in the house to the wife.
• The husband has not obtained a clearance certificate from the ATO prior to the transfer.
The husband is regarded as the notional vendor and the wife as the notional purchaser (even though no payment is made). The impact of the new law is that the wife is required to pay $300,000 to the ATO as withholding tax on behalf of the husband. At the appropriate time the husband would lodge a tax return. The refund of the withholding tax paid would be paid to him.
The easy solution in this case, noting the husband is an Australian taxation resident, is that he obtains a clearance certificate. Normally, the ATO will provide this within two weeks of application and it’s valid for 12 months. Then, in our example, the wife won’t have to pay $300,000 to the ATO.
Otherwise, allowance needs to be made for the withholding tax payment as part of the settlement.
The new law is also relevant to some other assets but the purpose of this article is to highlight common family law implications, rather than perform a detailed study of the foreign resident capital gains withholding tax regime.
It’s a significant change that will impact many Australian families as they divide assets after separation. Let’s hope that people affected get the right specialist advice to avoid the sting of an unexpected payment to the tax office.
Alan Wright is an Accredited Family Law Specialist and leads the Family Law team at Catherine Henry Lawyers.