Taxation Administration (Remedial Power—Foreign Resident Capital Gains Withholding) Determination 2017

Foreign resident capital gains withholding (Subdivision 14‑D): This regime, contained in Div 14 of Sch 1 to the TAA, requires a purchaser (or in some cases a securities issuer) to withhold 12.5% of the proceeds from the disposal of certain taxable Australian property by a foreign resident vendor. The withholding applies to direct disposals of real property, indirect disposals of certain entities holding real property, and other CGT assets with the necessary connection to Australia. The amount withheld is paid to the Commissioner. The vendor is then entitled to a credit for that amount against their assessed income tax liability.

Credit provisions (sections 18‑15, 18‑20, 18‑25): Section 18‑15 entitles the entity whose withholding was paid to the Commissioner to a credit equal to the amount paid. Section 18‑20 provides that the credit is applied in satisfaction of certain tax debts of the entity. Section 18‑25 deals with the application of the credit where the entity has other amounts owing. These provisions are what the determination modifies.

Remedial power (section 370‑5 of Schedule 1 to the TAA): This section gives the Commissioner a limited power to make a legislative instrument that modifies the operation of a taxation law. The power can be exercised only if the Commissioner is satisfied that: the law does not operate as intended (for example because it produces an unintended or anomalous outcome); the modification is not contrary to the intended operation of the law; and the modification is not inconsistent with any policy intention of the government. The instrument must be disallowable by Parliament. This determination is one such instrument.

Transaction recognition for income tax purposes: The phrase “recognised for income tax purposes” is central to the modification. It refers to the income year in which the transaction is taken into account under the relevant income tax rules. For a disposal of a CGT asset, the timing of recognition depends on the CGT provisions: generally the year in which the contract is entered into, or if there is no contract, the year of the change of ownership. For other transactions, such as those involving trading stock or revenue assets, the recognition year may differ. The modification uses this concept to align the credit year with the year the gain or loss is assessable or allowable.

Remedial determination vs. legislative amendment: The determination is a legislative instrument made by a delegate of the Commissioner. It has the force of law but is subject to disallowance. It can modify the operation of primary legislation within the bounds of the remedial power, but it cannot change the fundamental policy of the law. The modification here is a narrow fix to a timing mismatch.

The determination primarily affects foreign resident vendors of taxable Australian property who are entitled to a credit under sections 18‑15, 18‑20 or 18‑25 of Schedule 1 to the TAA after an amount has been withheld and paid to the Commissioner under Subdivision 14‑D. These vendors now have the credit arise in the income year of the transaction rather than the year of payment to the Commissioner. That change can affect the timing of their tax liability, the amount of any refund, and the incidence of interest on overpayments or underpayments. For example, a vendor who disposed of a property in June 2017 but had the withholding remitted in July 2017 might have originally been required to claim the credit in the 2017-18 income year. Under the modification, the credit is lifted back to the 2016-17 income year, assuming the transaction was recognised in that year. That could reduce the vendor’s tax liability for 2016-17 and potentially create a refund of any excess withholding.

The determination also affects purchasers and their advisers, but only indirectly. The purchaser is still required to withhold and pay the amount to the Commissioner at the time of settlement or as otherwise required. The determination does not alter the purchaser’s duties. However, the purchaser may need to be aware of the change in the vendor’s treatment when responding to vendor requests for information about the year of payment or when dealing with clearance certificates.

The Australian Taxation Office (ATO) is affected in that its assessment systems and processing of credits must accommodate the modified timing. The ATO will need to accept that a credit can be claimed in an income year before the withholding amount was physically paid to the Commissioner, provided the transaction itself was recognised in that earlier year. This may require the ATO to cross reference the year of the transaction with the year of the credit claim.

Tax practitioners and accountants advising foreign resident clients must adjust their advice on the timing of credit claims. For transactions on or after 1 July 2016, the credit should be claimed in the year the transaction is recognised. This may require amendments to prior year returns if the credit was originally claimed in the wrong year. For ongoing transactions, the practitioner must identify the correct recognition year and ensure the credit is reported accordingly.

Finally, any entity that has relied on the default timing rule for credits under section 18‑20 or 18‑25 (for example, set off of credits against other debts) may need to reassess the income year in which those set offs occur. But the modification only affects the attribution of the credit, not its quantum or its basic character as a credit.

The determination does not create new duties. It modifies a right: the right to a credit under sections 18‑15, 18‑20 and 18‑25 of Schedule 1 to the TAA. The modification changes the timing of when that right arises for credits linked to amounts paid under Subdivision 14‑D. Specifically, the right to the credit is treated as arising in the income year in which the transaction that triggered the withholding is recognised for income tax purposes for the entity.

This is a beneficial change for vendors because it removes a potential mismatch between the year the gain is recognised and the year the credit is available. Without the modification, a vendor could face a timing disadvantage: the gain is assessable in Year 1, but the credit arises in Year 2. That could cause the vendor to pay tax on the gain in Year 1 without the benefit of the credit until Year 2, or to make a voluntary payment to the Commissioner to avoid a shortfall. The modification aligns the credit with the gain, so the vendor can claim the credit in the same year the gain is recognised.

The right to the credit remains conditional on the amount being paid to the Commissioner. If the purchaser fails to withhold or to pay the amount, the vendor does not obtain a credit (unless the Commissioner recovers the amount from the purchaser). The determination does not relieve the purchaser of the withholding obligation; nor does it give the vendor an automatic refund before the amount is paid.

The determination also affects the Commissioner’s duty to apply credits. Under section 18‑20, the Commissioner must apply the credit in satisfaction of certain tax debts of the entity. With the modified timing, the credit is taken to have arisen in the earlier year, so the Commissioner must apply it as at that year. This may affect the calculation of any interest for late payment or refund interest.

The modification is mandatory for the purposes of the remedial power. It does not give the entity a choice; the credit is treated as arising in the transaction recognition year regardless of whether that is more or less favourable to the entity. However, if the entity wishes to claim the credit in the later year (e.g., because it has losses in the earlier year), the modification may force it to be in the earlier year, potentially wasting the credit. But the entity could potentially seek a private ruling or consider other provisions, but the determination itself does not allow an election.

The determination itself contains no penalty provisions. Penalties for failure to comply with Subdivision 14‑D remain unchanged. For example, a purchaser who fails to withhold or pay the withholding amount to the Commissioner may be liable to an administrative penalty under the TAA, as well as interest. The vendor’s misstatement of the year in which the credit arises could lead to a shortfall if the credit is claimed in the wrong year and the ATO takes a different view. However, because the determination modifies the law to treat the credit as arising in the transaction year, a vendor who follows the modification should not be penalised. Conversely, if a vendor continues to claim the credit in the year of payment to the Commissioner contrary to the modification, they may be overstating their credit for that year and understating their liability for the earlier year, which could attract a penalty under Div 284 of Sch 1 to the TAA (shortfall penalties).

The ATO has enforcement powers under the TAA to recover underpaid amounts and impose penalties for false or misleading statements. The modification does not alter those powers. It may, however, affect the time at which a shortfall arises. If the credit is moved to an earlier year, the vendor’s liability for that earlier year reduces; the assessment for that year may need to be amended. If the credit was originally claimed in the later year and the vendor obtains a refund in that later year, the ATO may need to recover the overpaid refund. The determination does not provide a transitional mechanism for such adjustments beyond its general modification.

There is no specific enforcement mechanism in the determination. It is a legislative instrument that operates automatically. Compliance is primarily ensured through the ordinary tax return process: the vendor must report the credit in the correct year, and the ATO will verify that the amount has been paid by the purchaser. Any dispute about the year of recognition would be resolved through standard objection and review procedures.

Importantly, the modification applies to transactions entered into on or after 1 July 2016. That means there may be historical transactions where the vendor has already lodged returns and claimed the credit in the payment year. Those returns are now inconsistent with the law as modified. The vendor may need to voluntarily amend those returns to claim the credit in the transaction year. Failure to do so could result in a shortfall when the ATO eventually reviews the matter. The period for amending returns is generally 4 years, but the ATO may have additional time if there is fraud or evasion.

The determination directly modifies the operation of sections 18‑15, 18‑20 and 18‑25 of Schedule 1 to the TAA, and any other provision of a taxation law the operation of which is affected by those sections. That catch‑all phrase captures provisions such as those dealing with assessments, refunds, interest, and penalties that depend on the timing of the credit. For example, the modification will affect the calculation of the general interest charge (GIC) and the shortfall interest charge (SIC) for any period preceding the recognition of the credit.

The determination also interacts with the income tax law generally, particularly the provisions that determine when a transaction is “recognised for income tax purposes”. For a CGT event, that timing is governed by Part 3‑1 of the Income Tax Assessment Act 1997 (ITAA 1997). The standard rule is that a CGT event happens when the contract is entered into, or if no contract, when the change of ownership occurs. For disposals of trading stock, the timing is governed by the timing of the sale and the rules in Div 70 of ITAA 1997. For revenue assets, the timing may be different. The determination does not define “recognised for income tax purposes”, leaving that to be determined under the ordinary law. This creates interpretive questions: for example, if a foreign resident disposes of an asset under a contract that is completed in a later income year, the CGT event generally happens at contract date, but the withholding amount is paid at settlement. The modification would treat the credit as arising at contract date. That is consistent with the general CGT timing.

The determination also interacts with the remedial power itself (section 370‑5 of Sch 1 to the TAA). The determination must satisfy the Commissioner that the law does not operate as intended. The modification must not be contrary to the intended operation of the law. The ATO’s explanatory statement (though not part of the legislation) likely explains the intended operation. The modification is a legitimate exercise of the remedial power because it fixes a mismatch that was likely unintended by Parliament.

There is an interaction with the tax treaty framework, though the determination does not mention it. If a foreign resident is resident in a country with which Australia has a double tax agreement, the credit for Australian tax withheld may interact with foreign tax credit rules in that country. The change in timing of the domestic credit could affect the timing of claiming foreign tax credits. However, the determination does not address this directly; it only modifies domestic credit timing.

The determination also interacts with the Legislation Act 2003: as a legislative instrument, it is subject to tabling, disallowance, and sunsetting. It was made on 31 July 2017 and commenced when no longer liable to be disallowed. It is a stand‑alone instrument and does not amend any primary legislation. It will sunset in 10 years under the Legislation Act unless remade.

Finally, because the modification is retrospective to 1 July 2016, it interacts with the transitional provisions of the original foreign resident CGT withholding regime (which commenced on 1 July 2016). The regime itself had a start date of 1 July 2016. The determination applies to all transactions entered into on or after that date, meaning it reaches back to the very start of the regime. For transactions between 1 July 2016 and the date of the determination (31 July 2017), vendors may have already lodged returns based on the unmodified law. The determination overtakes those lodgements and deems the credit to arise in the transaction year. This retrospective effect may require vendors to amend returns, and the Commissioner may need to issue amended assessments (or treat self‑amended returns favourably).

This determination has not been amended since it was made. It is a single‑purpose legislative instrument that has not been the subject of any amending instrument. The determination itself provides for its commencement on the first day it is no longer liable to be disallowed under section 42 of the Legislation Act 2003. That occurred after the disallowance period expired in about 15 sitting days after tabling. As of the date of its making (31 July 2017), it has remained in force unaltered.

There is no amendment history to document. The determination is not part of an Act and does not appear in amending schedules of other statutes. It is a discrete instrument that operates independently. If the Commissioner wishes to modify the timing further or to address other anomalies in Subdivision 14‑D, a new determination would be required. The remedial power under section 370‑5 does not allow the Commissioner to amend this determination through a later instrument unless it is revoked and replaced. However, the determination could be revoked or varied by a later remedial instrument, provided the conditions of section 370‑5 are again satisfied.

Given the narrow scope of the modification, there has been no need for amendment. The factual circumstances (retrospective application since 1 July 2016, alignment of credit timing) appear to have been accepted. The ATO may have issued public guidance to assist taxpayers in applying the determination, but that guidance does not constitute an amendment to the instrument itself.

The sunsetting date under the Legislation Act 2003 is 31 July 2027 (10 years after making). Unless the determination is remade or extended before then, it will cease to have effect. At that point, the timing of credits would revert to the default rules under the unmodified provisions (unless a new remedial instrument is made or the law is amended). Taxpayers should be aware of this potential end date when considering long‑term compliance.

There is no reported litigation directly concerning this determination. The determination is a legislative instrument made by the Commissioner under the remedial power, and it has not been the subject of judicial review or challenge. The underlying provisions it modifies (sections 18‑15, 18‑20, 18‑25 and Subdivision 14‑D) have been the subject of some judicial consideration, but not specifically on the timing issue addressed by the determination.

The lack of litigation may reflect that the determination is seen as a sensible, pragmatic fix. It aligns the credit year with the transaction year, reducing the potential for disputes about when a vendor is entitled to the credit. If there were a dispute, it would likely focus on the meaning of “recognised for income tax purposes” for a particular transaction. For example, a vendor might argue that a transaction is recognised in one year based on an interpretation of the CGT rules, while the ATO might take a different view. That would be a question of law under the ITAA 1997, not a challenge to the validity of the determination itself.

The determination could theoretically be challenged as an invalid exercise of the remedial power under section 370‑5, on the ground that the Commissioner misjudged whether the law operated as intended. However, the threshold for such a challenge is high; the Commissioner’s opinion is subject only to limited judicial review (not a merits review). The determination has remained on the books since 2017 without challenge, suggesting it is regarded as within power.

There are also no cases that interpret the modification in the context of other provisions, such as the application of section 18‑20 for set‑off of credits. The determination is relatively clear in its terms, so litigation is unlikely unless a novel fact pattern arises.

Practitioners should monitor any future cases that interpret “recognised for income tax purposes” in this specific context, as that could affect the operation of the determination. For now, the absence of litigation means the ATO’s administrative views (if expressed in rulings or guidance) carry significant weight.

The determination is short, but several features can catch practitioners off guard. First, the modification applies only to credits in respect of amounts paid to the Commissioner under Subdivision 14‑D. It does not apply to other credits under sections 18‑15, 18‑20 or 18‑25 that arise from other types of withholding (e.g., dividend withholding, interest withholding, or royalty withholding). Practitioners must check that the credit source is properly identified. If a foreign resident vendor receives a credit that relates partly to Subdivision 14‑D and partly to another withholding regime, only the Subdivision 14‑D portion gets the timing modification.

Second, the modification uses “recognised for income tax purposes for the entity”. This is not a defined term. For a vendor who is a trust or partnership, the transaction may be recognised at the trust or partnership level, but the credit may flow through to beneficiaries or partners. The modification says “for the entity”, which likely means the entity that is entitled to the credit (i.e., the vendor entity). If the vendor is a trust, the transaction may be recognised in the trust’s return, but the beneficiaries may be assessed on their share of net income in a different year. The determination does not address how the credit timing interacts with the beneficiary’s year of assessment. Caution is needed.

Third, the retrospective application to transactions on or after 1 July 2016 is a trap for those who have already lodged returns. A vendor who claimed the credit in the 2017‑18 return for a 2016‑17 transaction may need to amend the 2016‑17 return to claim the credit there, and also amend the 2017‑18 return to remove the credit. Failure to do so could result in a shortfall in 2016‑17 and an overclaimed credit in 2017‑18. The ATO may not automatically adjust; it may rely on the taxpayer to self‑amend. The time limit for amending the 2016‑17 return will expire on the later of 30 June 2021 (4 years) or later if the ATO extends. Many vendors may have missed this.

Fourth, the modification is mandatory. If a vendor would prefer the credit in a later year (e.g., because of low tax rate in that year), they cannot elect to have it in that later year. The credit is forced into the transaction year. This could be unfavourable if the vendor has carried‑forward losses that will expire or if they have refundable offset rules. There is no ability to choose.

Fifth, the interaction with section 18‑20 (application of credit) could produce unexpected results. Under section 18‑20, the credit must be applied in satisfaction of certain tax debts. If the credit is now deemed to arise in the earlier year, those debts are as at that earlier year. The vendor might have had debts at that time that are different from debts in the actual year of payment. This could affect the allocation of the credit.

Sixth, the determination does not address what happens if the transaction is never “recognised” because the foreign resident does not file a tax return or because the gain is exempt from tax (e.g., main residence exemption). If the transaction is not recognised for income tax purposes (i.e., the foreign resident is not required to include the capital gain in their assessable income because of an exemption), the phrase “income year in which the transaction is recognised for income tax purposes” may be ambiguous. The credit may never arise, or the ATO may treat it as arising in the year of the transaction even if no return is lodged. The determination does not clarify.

Seventh, the determination only modifies the timing. It does not change the amount of the credit or the rate of withholding. The credit is equal to the amount paid to the Commissioner. If the withholding amount exceeds the vendor’s actual tax liability, the vendor gets a refund of the excess. That refund may now be accelerated to the transaction year, which is beneficial to the vendor.

Finally, the determination is a legislative instrument, not a public ruling. It has the force of law, but it is not widely known. Many practitioners may not be aware of its existence, leading to incorrect timing in returns. The ATO has likely updated its systems and guidance, but the onus remains on the taxpayer to apply the law as modified.

Compliance involves identifying when a transaction triggers Subdivision 14‑D withholding and ensuring that the credit for that withholding is claimed in the income year the transaction is recognised for income tax purposes for the vendor.

For each transaction entered into on or after 1 July 2016, the vendor (or their adviser) must determine:

• The date of the transaction (generally the date the contract is entered into, or for a transaction without a contract, the date of change of ownership).
• The income year in which the transaction is recognised under the vendor’s relevant tax rules (usually the year of the CGT event, or the year of derivation for revenue items).
• The amount of withholding paid to the Commissioner by the purchaser (the credit amount).
• Any existing credit claims in earlier or later returns for that same withholding.

If the vendor has already lodged a return for the income year in which the transaction occurred and did not claim the credit, or claimed it in a later year, they should consider lodging an amendment to the earlier year’s return to include the credit. Simultaneously, they should amend the later year’s return to remove the misclaimed credit. The ATO’s online services allow self‑amendment for most small businesses, but for larger entities or complex structures, a written amendment request may be required.

When preparing a return for the year of the transaction, the vendor should report the credit in that year, even if the withholding amount has not yet been paid to the Commissioner by the time of lodgment. The modification deems the credit to arise regardless of actual payment timing. That said, the credit will only be allowed if the amount is eventually paid to the Commissioner. If the purchaser fails to pay, the vendor may later need to reverse the credit. The determination does not address that contingency; presumably the normal rules for loss of entitlement apply.

The purchaser is not directly affected, but may need to provide information to the vendor about the transaction date and amount withheld. The vendor should obtain a copy of the withholding clearance certificate or any notice from the purchaser showing the disposal date and the amount paid.

The entity claiming the credit must be the same entity that disposed of the asset (the vendor). If the vendor is a trust, the trustees may need to determine the year in which the transaction is recognised for the trust, then allocate the credit appropriately.

Practitioners should maintain a record of the transaction date and the income year recognition analysis in case the ATO asks. Where there is doubt about the recognition year (e.g., a complex earn‑out or deferred settlement), a private ruling should be sought.

For past transactions from 1 July 2016 to 31 July 2017 (the date the determination was made), vendors who have not yet amended may do so voluntarily. The ATO has indicated in practice statements that it will not penalise taxpayers who relied on the unmodified law before the determination, but after the determination all taxpayers are expected to apply it. Therefore, any unfiled amendments should be attended to promptly. For transactions after 31 July 2017, the correct treatment has always been to apply the determination.

Finally, monitor the sunsetting date (31 July 2027) in case the determination is not remade. If it lapses, the default timing will apply again. That could affect transactions post‑2027, though the law may have been amended by then. Compliance requires staying current with remedial instruments.