Monday, 27 June 2016

Joe Hockey's great big red tape nightmare part 2

Today I had the privilege, along with our other solicitors at Harrington Family Lawyers,  of receiving inhouse training from Murray Howlett and Jennifer Veitch, both from chartered accountants Pilot Partners about the withholding tax regime that starts on Friday. Although it looks like a nightmare, their flowchart above simplifies the nightmare created by this red tape monster.

Their key message- if you need to get approval from the ATO- which you will need to do with every bit of real estate to be transferred over $2 million, do so as early as possible, so that you have the ATO's certificate in hand for up to a year.

The process is supposed to be automated, and is bound to have delays, sooner or later. There are approximately 3 or 4 employees at the ATO devoted to issuing certificates- when the ATO estimates there will be 240,000 transactions a year. Or to put it another way- there are 5,000 transactions a week (assuming a 48 week year, allowing for leave entitlements), making each of the 4 employees (assuming there are 4 not 3) sign off on 1,250 transactions per week, or 250 per day. On a 37 hour week, that is 34 per hour, or just under 2 per minute.

The ATO estimates that turnaround time should be 14 days. I am not so optimistic.

One could imagine that if you are the vendor or indeed a husband in a property settlement and the house has a net value of over $2 million, you might be concerned by seeking the certificate if you have been behind in your taxes. I am sure the ATO will use this opportunity to engage in data matching and then say it wants the money, or it issues a garnishee notice, or it refuses to issue a certificate until money is paid to it.

For the person acquiring the property, if there has been a failure to withhold the right amount in the right way, there is potential for the ATO to come asking for more!

What is more, when there is a company or unit trust that has greater than 50% of the gross value of its assets are held in land (no matter the value) and 10% or more by value of the shares or units are to be transferred, no matter how they are to be transferred, it is wise to obtain a certificate declaring that the vendor is not a foreigner. Failure to do so might incur the acquirer a great big tax bill, penalties and interest from the ATO.

It is unclear yet what happens in the common or garden transfer from husband to wife (or vice versa) when their family home is worth more than $2 million. Say it is worth $2.4 million. The home is owned in half shares by each of the husband and wife. If the husband does not obtain the certificate from the ATO, the wife is obliged to retain 10% of the gross value- and pay that to the ATO, and not pay it to the husband.  It is unclear if the amount to be withheld is $120,000 (being 10% of the husband's share) or $240,000 (being 10% of the total gross amount). The fact that there might be a $1 million mortgage over the property is irrelevant- the withholding tax is calculated on the gross, not the net value.

However, in rollover relief cases, the amount to be withheld (and this is the windfall work for accountants) is calculated on 10% of the cost base amount calculated for CGT. Let's go back to the example above. Let's assume that the cost base is $1 million of the total value of the property. That might mean that the amount to be withheld is $100,000 or $50,000.

With that simple example, one can see that the wife, to protect herself, might wish to withhold $240,000, but the husband (if he will not or cannot obtain the certificate) says the amount should have been just $50,000. It remains unclear in that example if BOTH the husband and wife need to obtain the certificate.

Lots of room for argument between lawyers. Lots of red tape and nightmare for anyone from now on.

Imagine there is a grazing property. The wife is transferring her interest to the husband. The station has been in the family forever, and he knows a thing or two about cattle. He couldn't imagine not holding on to it. The property is worth $6 million. If she doesn't supply the certificate in time, does he withhold $600,000 or $300,000? If the cost base is $2 million, does he withhold $200,000 or $100,000?

But - what if each of the titles is worth less than $2 million? Let's say there are 7 titles, and each is not worth more than $1 million. Then no withholding tax may need to be held.

BUT- if the station is owned by the family company, and therefore there will need to be the transfer of shares in the family company from the wife to the husband, then without the declaration by the wife (, the husband might pay wittholding tax on settlement of $100,000 or $200,000.

For distressed sellers, there can be variation certificates issued by the ATO to ensure that secured creditors don't miss out. These can be applied for by the acquirer, the disposer, and by third parties, such as the bank that has security. One can see banks applying for these certificates as many times as needed.

The types of cases that are caught include:

  • sales
  • exercise of options
  • family law property settlements
  • estates
  • internal restructures, including possibly changes of trustees.
We are at the beginning of a great big, costly red tape learning curve. Lucky us. 

Thursday, 9 June 2016

Joe Hockey's great big new red tape nightmare

Thank you to Julia Gillard, Joe Hockey, Tony Abbott and the Daily Telegraph for the latest round of idiocy, which will cause pain to pretty well everyone, add a layer of red tape that is not there now, and give no real benefits.

The problem?

Remember- foreign investors, mainly Chinese, were buying properties, including Sydney harbourside mansions and not being honest about who was buying them.

The outcome- a media campaign whipped up by Sydney's Daily Telegraph- which then forced Joe Hockey to take action.

His first step was to require certain properties to be sold. One might think the problem was solved. Not so, apparently.

His second step was to get legislation passed in February this year, effective 1 July 2016 to impose a withholding tax in effect on MANY sellers and disposors of property. It was apparently aimed at the big end of town, i.e., those foreign investors who couldn't tell the truth, apparently, and had bought real estate worth $2 million or more. 

But in the blunderbuss approach taken, the result quite simply is a mess. The Abbott government has imposed a great big new tax (in effect) on many sellers of property. This is why:

  1. If someone wants to sell taxable real estate worth $2 million or more, the purchaser MUST withhold 10% of the gross sale price at settlement UNLESS a clearance certificate issued by the ATO has issued saying to the effect that the seller is not a foreigner. Imagine you don't have the certificate, but you have sold a property worth $2.1 million, and have borrowings of $1.8 million. $210,000 has to be retained from the sale- and then sent to the ATO if no clearance has been obtained. The borrower in effect gets nothing until it has cleared through the bowels of the ATO, and in effect has to pay for the costs of the agent's commission.
  2. Yes, you got it. This means a new form for those sales. This also means that a government body that does not get involved actively in sales (unlike land titles, or for that matter, the banks) now is a player. Any buyer or seller over the threshold has to make sure that they have that little bit of paper. Imagine not having it. It might cause settlements fall over, in part because buyers can't comply with their borrowing requirements, or because the ATO isn't efficient and can't get the paper turned around quick enough. 
  3. To give an example, a client of mine sought a private tax ruling from the ATO. He was told 30 days to get it issued. The ATO took 6 months! Let's hope they can produce these documents in quicker time, or they will be crashing contracts all over the place. If in doubt, read this statement by the ATO:
    "If the vendor is automatically assessed as an Australian
    resident, a clearance certificate will be issued electronically
    within days of the application being submitted.
    If there are data irregularities or exceptions, some manual
    processing may be required and the clearance certificate
    will be provided within 14–28 days.
    Higher risk and unusual cases may require greater manual
    intervention and could take longer to process."
  4. It gets worse. The law does not just apply to sales over $2 million. It applies to ALL disposal of an entity (like a company or a trust) where the majority of the assets are taxable real estate ( i.e. other than the family home under $2 million, presumably). No value is set. Everything is covered by this: family law property settlements, restructure of deed arrangements (say even possibly with private superannuation funds), deceased estates, mining leases, options for any of that property and on and on it goes. In ALL of those cases, IRRESPECTIVE OF THE VALUE OF THE LAND, it will apply. Just imagine that Bob and Bill are two brothers who have had a bad falling out. One of the things they agree to as part of a deal in the Supreme Court is that Bob will transfer his share in XYZ Pty Ltd to Bill. A value is given of $1. XYZ Pty Ltd is in effect valueless. It owns $400,000 worth of land in the desert near Boulia. XYZ Pty Ltd is mortgaged up to the hilt: it owes the bank $500,000. Before Bob can comply with the Supreme Court order to transfer his $1 share to Bill, Bill must get ATO clearance, which In an indirect case, he can do so by declaration. Otherwise, Bob must withhold, presumably, $40,000 (which of course he doesn't have) to comply with the legislation.

 Some of the obvious issues for disposers  (and corresponding for buyers) are:

1.         whether a clearance certificate, variation or declaration is required;
2.         the necessary timing for applying for and obtaining that certificate
3.         how and when to calculate the market value for the asset or the component of the asset that is taxable Australian property or interests in taxable Australian property;
4.         any GST component of the transfer;
5.         risks to the sellers when the 10% is not given to them or their bank but instead sent by the purchasers to the ATO;
 6. risks of the buyer not sending the 10% on (but still getting the property)
7.         ongoing risks of withholding and other taxes payable to the ATO.
8. what happens if the disposer doesn't get the certificate, variation or declaration in a timely manner? 

And the best part of this mess? It starts on 1 July. So what, you say, that's the beginning of the new financial year, an obvious time for it to start. It is also the day before the Federal election. The Government is in caretaker mode. The ATO CANNOT sort out major issues as to how this is to be applied until after the election, because it has no one from above to make decisions for it, after these changes have commenced. Lucky us. Thank you, Joe.