On 6 September 2016, the Commissioner registered a ‘legislative instrument’ which will sound obscure and is, in fact, not all that momentous. But it is a good basis for re-visiting the non-resident CGT withholding provisions in Subdiv 14-D of the Taxation Administration Act 1953 – First Schedule (TAA1), and the weird and wonderful way in which they work.

What the Instrument covers

Before getting on with the explanation of the withholding provisions, I note the instrument is called the PAYG Withholding variation for foreign resident capital gains withholding payments – deceased estates and legal personal representatives. The commissioner used his power, in s14-235(5) of the TAA1, to issue this instrument. This section gives him the power to vary (including to nil) classes of amounts which would otherwise be payable to the Commissioner. And the classes of amounts are the payment obligations that would otherwise arise on:  (i) the transmission of relevant Australian real property (‘Australian Property‘) from the deceased to a legal personal representative (LPR);  (ii) the transfer of that Australian Property to a beneficiary of the deceased estate and  (iii) on a surviving joint tenant acquiring the deceased joint tenant’s joint interest in Australian Property on his or her death (under the principle of survivorship). The relevant Australian real property to which these provisions apply (under s14-200(1)(c)) is ‘taxable Australian real property’ (‘Real Property‘) and an ‘indirect Australian real property interest’ (‘Indirect Real Property‘) – defined, respectively, in s855-20 & s855-25 of  of the Income Tax Assessment Act 1997 (ITAA97).

Why it’s interesting

One might ask, however, why do these provisions apply in the first place (and need variation to nil). They are to withhold money that would otherwise got a non-resident, to help pay any CGT the non-resident has to pay. Here there is no CGT to pay and no money changing hands. The answer lies in the fact that the provisions use CGT language to achieve these CGT objectives, but this language doesn’t apply well for these death related transactions or events.

Why pay ATO even though not paying for the asset?

(a)   For instance, the key provision obliges a person to simply ‘pay … an amount’ (s14-200(1)).  And the amount to be paid is 10% of “the first element of the *CGT asset’s *cost base just after the *acquisition” (ss(3)). This is meant to capture consideration give by the acquirer. But an LPR and a beneficiary of a deceased estate are deemed to have a cost base under s128-15(4) of the ITAA97, even though they have paid nothing for the asset. Broadly, this ‘cost base’ is the market value of pre-CGT assets the deceased’s cost base for their post-CGT assets. The same can be said for a surviving joint tenant. He or she is deemed to have a similar cost base for the interest of the deceased joint tenant’s interest, under s128-50(3)&(4) of the ITAA97.

Why these provisions apply to LPRs and beneficiaries of deceased estates and surviving joint tenants

(b)   Also, the provisions are triggered because each of an LPR, the beneficiary and a surviving joint tenant are all persons who (under s14-200(1)(a)) relevantly “become the owner of a *CGT asset as a result of *acquiring it from one or more entities” under s109-55, items 1, 2 & 3, respectively. Nor does there have to be a capital gain for the provisions to be triggered (see s14-210 and generally). The thrust of the deceased estate and surviving joint tenants provisions (Div 128 above) is to avoid any of these transactions giving rise to any capital gain and yet this Legislative Instrument was still required.

Why the provisions are no limited to a deceased that is non-resident

(c)  these provisions could apply, if the deceased was a non-resident or there was reason to suppose that he or she was a non-resident (s14-200(1)(b) & s14-210(1)(a)-(d)). But the application of the provisions is not limited to that. The provisions also apply for any acquisition of any Australian Property (under s14-210(1)(e)) and so apply to everyone, subject to some exceptions (eg. Australian Property with a market value under $2m – s14-215(a)). Outside this $2m exception, there are two types of general exemption – one that can be self administered by disponor (who could give a declaration that they are not resident under s14-210(3) or an exemption that can’t be self-assessed (which is a ‘clearance certificate’ issued by the ATO under s14-210(2)). The difference lies in the type of property. Transactions involving actual Real Property can’t be self-assessed and require a Clearance Certificate. Transactions involving Indirect Real Property can avoid having to pay the ATO the 10% when the disponor gives a declaration (under s14-225) and the acquirer does not know it to be false (s14-210(3)(b)).

Things that can’t be done in time (or it’s difficult or pointless to do)

(d)  Another reason for this Legislative Instrument is that the things mentioned above would have to be done (obtain a Clearance Certificate or give a Declaration) prior to ‘acquiring’ the asset. This would be impossible in the case of a surviving joint tenant as they acquire the deceased’s interest immediately on death (and in most cases the time of death is not known before hand). The same would be the case for Australian Property passing from the deceased to the LPR (because the deceased is not usually in a position to obtain the certificate or give the declaration before dying). In the case of the Australian Property passing to the beneficiary, there might be time in the administration of the deceased estate, to do this, but the Commissioner (rightly) thought this was unnecessary given the purpose of the provisions.

[Federal Register of Legislation – Legislative Instrument & Explanatory Memorandum] [LTN 172, 6/9/16]