Maximizing Seller Benefits in Foreign Resident CGT Withholding
When sellers have the option to exempt buyers from withholding obligations or reduce withholding rates, it's usually in their best interest to do so. Why? Because foreign resident CGT withholding acts as a non-final withholding tax. When buyers pay the withholding amount upfront at settlement, sellers can only claim refundable credits on their tax return for that income year. This means there's a delay between the buyer's tax payment and the seller's ability to benefit from those credits against their tax liability.
Timing of Credit Claims – A Tax Tip:
When a capital gain occurs on a CGT asset subject to foreign resident CGT withholding, credits are claimed in the same income year as the tax liability arises from the capital gain. This rule is specified in the Taxation Administration Determination 2017 ('CRP 2017/1'). CRP 2017/1 overrides the usual timing rules, allowing sellers to claim credits in the income year when the tax liability arises, rather than the year when the withholding tax is paid.
For instance, if a TARP sale contract is signed in March 2020 (2020 income year) and settled in September 2020 (2021 income year), according to CRP 2017/1, tax credits (i.e., withholding tax) can be claimed in the 2020 tax return when the tax liability arises, rather than waiting until the 2021 tax return when the withholding tax is paid.
For further assistance, reach out to Tax Ideas Accountants & Advisers at +61 2 83181545 or schedule an appointment via our live calendar.