On 1 July 2016 Australia’s real property withholding tax regime came into effect. In general terms, there is a presumption that the seller of real property is a non-resident and the purchaser is required to hold 10% of the purchase price and pay this to the Australian Taxation Office (“ATO”) unless a Clearance Certificate has been issued.
This has raised red flags for family lawyers, who need to be mindful of the legislation when drafting Orders and Binding Financial Agreements. If a Clearance certificate is required but overlooked, clients may receive a twofold blow from the ATO. Clients could be required to pay the withholding to the ATO on their former spouse’s behalf, with their former spouse then having the withholding refunded to them on the lodgement of their tax return.
The legislation has recently changed and from 26 October 2016 there has been a class variation to this regime. There will be no withholding or Clearance Certificate required where transfers are covered by the Capital Gains Tax (CGT) roll-over relief for marriage and relationship breakdowns. This roll-over relief applies where the transfer or creation of a CGT asset takes place because of a Court Order, Maintenance Agreement, Binding Financial Agreement or Arbitration award under the Family Law Act 1975.
Where the CGT roll-over relief does not apply, spouses and family lawyers will still need to consider the new withholding tax regime where they are transferring real property. For instance, the roll-over relief does not apply where property subject to CGT does not necessarily have to be sold to meet the entitlements of one of the parties to the property settlement proceedings.
As tax can often go overlooked in family law proceedings, it is important to have a family law specialist with extensive knowledge of family law legislation and the tax consequences of effecting a property settlement.