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In Check Issue 72 | September 201628 September, 2016
Table of contents
If you missed LPLC’s three recent bulletins about the new CGT withholding regime you can read them here. As our bulletins explain, the new regime applies to acquisitions of various assets. This is a broader concept than just buying land. It can include deemed ownership of land on the death of a testator, transfers of land under a will or a Family Court order and transfers of shares. Every practitioner needs to understand the breadth of this change.
The bulletins cover:
- CGT withholding payments for real property sales of $2M or more
- CGT withholding payments for options, company title interests and indirect Australian real property transactions
- Practical examples.
CGT assets – more than just real estate
A CGT asset for the purpose of the new CGT withholding regime is one of the following.
- Taxable Australian real property. The Australian Taxation Office (ATO) has given the following examples:
- land, buildings, both residential and commercial property
- leases over real property
- mining, quarrying, prospecting rights.
- An indirect Australian real property interest. This means a 10 per cent or more interest in an Australian entity where the majority of the entity’s assets consist of Australian real property or interests in Australian real property.
- An option or right to acquire taxable and/or indirect Australian real property.
Clarification for some acquisitions
To ameliorate the effect of the legislation on some acquisitions a legislative instrument was registered on 6 September 2016 declaring that the payment required is varied to nil when:
- a legal personal representative acquires relevant assets on the death of a person
- a beneficiary obtains ownership of the relevant assets by way of direct transfer from the deceased or from the legal personal representative of the deceased
- a surviving joint tenant acquires the deceased joint tenant’s interest in the relevant asset.
While these acquisitions are still covered by the withholding regime there is nothing the acquirer has to do as no amount must be withheld and paid to the ATO.
CGT payment exemptions do not apply
There seems to be a misapprehension by some practitioners that they don’t have to worry about the withholding regime in situations where CGT payment exemptions apply such as the principal place of residence exemption. This is not the case. The exemptions for payment of CGT do not apply to the new CGT withholding regime.
Treatment of separate interest titles
The ATO has responded to example 3 in our third bulletin about treatment of separate interest titles.
Example 3 – two vendors, each has an interest title, total price $2.2M
Two vendors each hold a separate interest title for a 50 per cent share in a property.
Each vendor enters into a separate contract of sale with the same purchaser for a combined price of $2.2M. The contract is dated 2 July 2016. The sale is input taxed for GST purposes as the supply of existing residential premises.
Settlement is due in 60 days.
The issue here is whether the regime applies to each interest title separately or to the property as a whole.
It is recognised that each state and territory has its own land title law, so whether the FRCGW regime applies to the acquisition of interests in real property will turn upon the facts and circumstance of each case and the land titles regime operating in the particular State or Territory. However, the general view is that the FRCGW would apply in the example provided.
Although the transaction results in the purchaser acquiring two CGT assets – namely, each vendor’s separately transferrable lot recorded as separate folios (i.e. separate interests) on the certificate of title to the land – the fact is that the purchaser has two CGT assets that are similar namely (an interest in one parcel of land), each former vendor’s respective interest in the certificate of title as represented by the separate folios on the one certificate of title.
As a result of subsection 14-215(2), the market value for purpose of paragraph 14-215(1)(a) is the market value of each CGT asset of the similar interests in the parcel of land. Therefore the aggregate market value of $2.2M is used to determining the amount of the withholding – with the withholding amount being proportionate to each vendor’s interest and will be $110,000 for each sales transaction (10 per cent of the first element of the interest’s cost base = 0.10 x $1.1M).
Land Victoria has announced that priority notices will be introduced in Victoria in December 2016. They will only be able to be lodged electronically using an Electronic Lodgment Network.
Priority notices already exist in Tasmania and Queensland (known as settlement notices). The most notable difference between a priority notice and a caveat is the priority notice expires after 60 days. Land Victoria will develop a comprehensive guide for customers in the near future. For more information see Land Victoria’s customer notice here.
New laws will come into operation on 12 November 2016 to protect small businesses from unfair terms in standard form contracts in much the same way as consumers are currently protected.
Small businesses are defined as businesses employing less than 20 people. The standard form contract must have a value of less than $300,000 or $1M if the contract has a term of more than 12 months. Contracts that are entered into or varied on or after 12 November 2016 will be subject to the new law. For more information see the ACCC website here.
Practitioners advising on standard form business to business contracts for their clients who provide goods and services should consider whether any of the terms could be considered unfair and discuss this with their clients.
The format of our GST frequently asked questions on our website has been refreshed and is now easier to read. The FAQs can be easily accessed by hovering your cursor over the risk management box on the front page of the website and then clicking on the FAQ link in the menu that appears. You can also click here to go straight to the FAQ page.
Practitioners are requested to review the FAQs before they use our GST hotline enquiry service as the answers to many of the enquiries we receive can be found in the FAQs.
Q: My client wishes to sell a commercial property that was leased until February 2015 when the tenant left before the lease expired. My client has erected a ‘for lease’ sign and engaged several real estate agents to market the property for rent. It has since been tenanted on a monthly basis for several months but is currently vacant. Can we apply the going concern exemption?
A: What makes the supply of tenanted commercial premises eligible for treatment as the supply of a going concern is that the supplier has been carrying on a letting enterprise which it supplies to the recipient to be carried on by the recipient should it choose to do so.
Where commercial premises have been tenanted but cease to be, the ATO accepts that a letting enterprise can continue in relation to the vacated premises if the owner promptly undertakes an appropriate marketing campaign for the re-letting of the premises and does not suspend or abandon that campaign – see GSTR 2002/5, at paragraph 151.
The owner’s efforts to re-let must have:
- commenced as soon as it became aware of the impending vacancy
- must be reasonable in scope and extent and
- must not have been suspended.
The owner has to keep records of the marketing campaign and any responses to it. They need to be able to persuade the ATO that reasonable and appropriate efforts had been made to re-let.
In this example because the premises have been vacant for so long, with only a short casual period of letting, the difficulty associated with trying to persuade the ATO that a letting enterprise has continued is increased considerably. It may be suggested that the owner has not been sufficiently accommodating in relation to the rent asked and the other commercial terms offered. The short-term letting does help.
You can apply for a private ruling if in doubt as to whether the vendor has done enough to satisfy the ATO.
We have a full program of risk management seminars planned for six months and the dates are listed on our website under Training to help you map out your CPD year. Brochures for each series will be emailed to you.
Legal Business Essentials
Registrations open | 18 October 2016 and 3 November 2016
Registrations open 5 October 2016
Essendon – Wednesday 9 November, Ringwood – Tuesday 15 November, Dandenong – Thursday 17 November, Bundoora – Wednesday 23 November.
Each month LPLC writes an article for the Law Institute of Victoria’s journal. The articles are posted on our website here at the start of each month.
Articles published in the past six months are:
April | Advising on contracts
Giving full and proper advice about contracts will help you avoid a claim.
May | Failing to plan is planning to fail
Practitioners need to be proactive from the outset in litigation matters.
June | Old claims and new building laws
The LPLC sees claims every year where practitioners have failed to properly advise a client about building issues.
July | Solicitor’s certificate basics
Practitioners must be aware of key risk management measures when they advise security provider clients. Some practitioners are surprised that LPLC continues to receive Amadio-type claims.
August | Delegation and supervision are essential claims prevent skills
Good delegators and supervisors will help your firm avoid claims. LPLC regularly receives notification of claims where the main cause is ineffective delegation and/or poor or no supervision.
September | Near enough isn’t good enough
Be careful to do the little things on transactional matters to avoid claims. This column in May 2016 emphasised the need to plan a litigation matter at the outset. This is equally the case for transactional matters.