Other evidence that a specific exclusion applies
As previously discussed on page 103, S.14-215 of Schedule 1 provides a list of exclusions to the application of the foreign resident CGT withholding rules.
Where an exclusion applies (e.g., where a sale is being made as part of the administration of a bankrupt estate), the seller should provide sufficient evidence of this to the buyer, which will support the buyer’s decision not to withhold an amount at settlement.
Valid variation notice
In some cases, the foreign resident CGT withholding rate (generally 12.5%) may be excessive (e.g., when compared to a seller’s tax liability on the transaction). A variation notice (issued by the ATO) allows a decreased withholding rate to be applied to the transaction, resulting in a lesser amount needing to be withheld at settlement. In fact, a buyer may not need to withhold at all, in the event the variation notice varies the withholding amount to nil.
Typically, it is a seller that applies for a variation notice where they believe that the 12.5% withholding rate is excessive compared to their actual tax liability on the disposal of a CGT asset. Examples of situations in which a seller may apply for a variation include where:
- the seller does not have a net capital gain for the year (e.g., due to capital losses, a CGT exemption or CGT roll-over) or their net capital gain is less than the withholding amount; or
- the seller does not have an income tax liability (e.g., where their tax deductions exceed their assessable income including the net capital gain).
In saying this, the legislation (in S.14-235(3) of Schedule 1) does not prevent an application for a variation notice from also being made by either a buyer or by a creditor (that is owed a debt by the seller). Refer to Law Companion Ruling (‘LCR’) 2016/5, which provides guidance on factors that the ATO will take into consideration in varying the withholding amount.