Where a seller has the ability to exclude a buyer from their withholding obligations (or reduce the withholding rate applicable to the purchase price), it is generally in the seller’s best interests to do so, given the adverse cash flow implications of having withholding tax paid upfront.
This is because foreign resident CGT withholding tax acts as a non-final withholding tax. When the withholding amount is paid by a buyer upfront (i.e., at settlement), a seller’s entitlement to refundable credits (of the withholding amount) only arises upon lodgment of their tax return for the relevant income year. There is therefore a time lag between when tax is paid by the buyer, and when the seller can benefit from credits arising from the payment (e.g., by applying these credits against their tax liability in their income tax return).
TAX TIP – Timing of when credits are claimed
Where a capital gain is made on a CGT asset (that is subject to foreign resident CGT withholding), credits are claimed in the same income year as that in which a tax liability arises on the capital gain. Refer to Taxation Administration (Remedial Power – Foreign Resident Capital Gains Withholding) Determination 2017 (‘CRP 2017/1’). Importantly, CRP 2017/1 overrides the general timing rules for credit entitlements (which would otherwise only allow credits to be claimed in the income year in which withholding tax is paid).
An example of the application of CRP 2017/1 is where a contract is entered into to sell TARP in March 2020 (i.e., the 2020 income year) and settled in September 2020 (i.e., the 2021 income year). In accordance with CRP 2017/1, tax credits (i.e., the withholding tax) may be claimed in the 2020 tax return (being the year in which the tax liability arises for the seller on the capital gain) rather than the 2021 tax return (being the year the withholding tax is paid).