It has been two months since Australia’s real property withholding tax regime came into effect. Since its announcement Murray Howlett from Pilot’s Tax team has spoken extensively about how the implementation of the new law would present risks for sellers, buyers and advisors involved in transactions involving real estate worth $2 million or more.
Since 1 July we have uncovered some anomalies with the Australian Tax Office’s (ATO’s) system that could present serious consequences down the track. Below is what we have discovered so far:
ATO off to a bad start in the age of the tax audit
Our tax team has discovered that the ATO system design and implementation of the new rules is inconsistent with the law.
At its core, the new law requires all vendors of real estate with a value in excess of $2 million to obtain a residency clearance certificate from the ATO to avoid a compulsory 10% withholding from the sale price. The law operates by imposing a 10% withholding tax liability on the purchaser at settlement if they do not hold a valid clearance certificate at that time.
While the law clearly states that a certificate must cover the date the contract is entered into, the ATO’s online system will automatically issue a certificate dated from the day of processing. There is in fact no ability to request an earlier date in the electronic system. This means that certificates issued for sellers whose land is already under contract will not provide any protection from the withholding tax.
The ATO’s response
In our communications with the ATO they have advised that the issue arose during the software design and implementation stage of building the system and will not be addressed before the end of the current tax year. They have also issued “administrative guidance” on their website that states a certificate will be valid if it covers the settlement date.
This appears to be a reasonable response, until you understand what the term ‘administrative guidance’ means. The ATO is only bound to stand by guidance they issue in the form of a binding taxation ruling. Any other statements and proclamations cannot be legally relied upon.
Our tax team has witnessed occasions when ATO auditors have chosen to ignore such guidance and stuck to the letter of the law. Should you be audited there is a chance they too will follow the law rather than guidance.
We have asked the ATO to reissue certificates covering the contract date we have previously advised them of.
Our advice to vendors would be to insist that the law be met to the letter, to avoid a potential liability for them.
Time is relative
Prior to 1 July, the ATO announced it expected to process the bulk of certificates within seven days.
We cannot speak to all of the applications processed by the ATO. However it has been our experience that if the title matches the ATO records, with no other anomalies, the turnaround is within this processing time. If there are any anomalies or complications, the processing time is well over seven days and in many instances, longer than the 28-day service standard. This reinforces our previous advice: get in early. If you are considering selling then apply before you have a contract, if possible. If you think the regime may apply to you, talk to your adviser to discuss your circumstances.
What’s in a name?
We predicted there would be difficulties in matching names between titles and certificates. Our experience has proven us correct. The ATO’s guidance says that the name on the certificate should match the name on the land title.
In Queensland, we can have the situation where a title shows “ABC Pty Ltd A.C.N. 123 456 780 trustee under instrument 234564789”. Following the ATO guidance, this whole string is what should appear exactly the same on the certificate.
In practice, we have provided the ATO with the name on the title and been issued a certificate with a different name, as recorded in the ATO’s system. This issue will also come up when there are differences in middle names, maiden names or misspellings shown on either the ATO’s records or the title.
We are yet to find a solution to this, other than contacting the ATO to correct the certificate.
We have also confirmed that in the case of partnerships and other cases where multiple names appear on the title, a separate certificate is needed for each entity, with each applying in accordance with their entity type.
Is a trust an entity?
We know a trust is legally not an entity and the title must always reflect this. However, we noted early on that the form designers at the ATO were unsure about this question, and now the application forms are somewhat confusing as a result.
In practice, we have found that the application process works if certificates are always applied for in the name of the trustee. This means that several sections on the forms that refer to trusts will almost never be used.
Non-lodgers and tax delinquents
We predicted before 1 July that the ATO might withhold certificates when tax returns were overdue or tax debts existed. We have witnessed the ATO issue certificates where tax returns have not been lodged (but with no obligation to do so).
However, we are still yet to confirm how serious defaulters will be treated (where the ATO believes a taxpayer has something to declare but hasn’t, or they have outstanding debts).
Where to from here?
Looking ahead, we will continue to share our knowledge based on our experiences related to processing certificates. This law came into effect very quickly and it did force the ATO to scramble to meet the 1 July deadline. By doing so the system is somewhat flawed.
Until the system issues are resolved we do recommend speaking to an advisor who understands what is involved to ensure your certificate provides the necessary protection.