TAX TIP – Variation applications by creditors
The ATO is required to consider a creditor’s right to recover a debt in exercising their variation power, and ensure that the Foreign resident capital gains withholding provisions do not give it a preferential position over other creditors. Refer to S.14-235(1) of Schedule 1 and paragraph 49 of LCR 2016/5.
Both secured and unsecured creditors may apply to the ATO for a variation where the payment of the full withholding amount jeopardises their ability to recover a debt owed by the seller. This may be the case, for example, where a creditor has a mortgage or other security interest over an asset subject to withholding, and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt secured by the asset. Refer to paragraph 50 of LCR 2016/5.
Where a seller intends to vary the withholding amount, it is their responsibility to provide the buyer with the variation notice and ensure its validity (i.e., that the settlement date is on or before the expiry date stated on the notice).
A seller can apply for the variation by completing an online ‘Variation application for foreign residents and other parties’ form. This should be completed well in advance of settlement to ensure that it can be finalised by the ATO on time. In the majority of cases (where the ATO has been provided all required information), the variation notice is issued within 28 days of the application date.
Note that several class variations have been issued by the ATO (varying the withholding amount to nil) for situations involving the acquisition of assets following an individual’s death, the acquisition of assets following a marriage or relationship breakdown, and the acquisition of assets from an income tax exempt entity. Refer to the TAX TIP on page 102.