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24 February 2020

ATO Clearance Certificates for Bankrupt Estates

Associate, Kerri Balaba, discusses a recent matter which involved navigating some complications that a seller faced because their property was part of a bankrupt estate.

The seller owned the property with others who were not bankrupt. The requirements of the Australian Taxation Office (ATO) foreign resident capital gains withholding regime can differ depending on the circumstances of the sellers and whether an exemption applies. A “Complex Advice Request” was required to be submitted to the ATO to ensure that the requirements were met and settlement was not delayed or prevented from occurring.

Background

Mr X is an Australian resident who owned a house in Queensland. He was the registered owner in his personal capacity (as a joint tenant with his wife) and in his capacity as one of the two trustees of his family trust.

In recent years, Mr X was declared bankrupt and therefore could no longer hold an interest in land in his personal capacity. His interest (in his personal capacity) in the property vested in his trustee in bankruptcy (“the bankruptcy trustee”). Mr X’s interest as a trustee of his family trust was not affected by his bankruptcy.

After part of the property vested in the bankruptcy trustee, the registered owners of the land were –

  • “The Trustee of the Property of Mr X, a Bankrupt”
  • “Mrs X”; and
  • “Mr X and Mrs X as trustees.”

When it came time to sell the property, the sale price was over $750,000.00 and entered into after 1 July 2017, triggering the foreign resident capital gains withholding regime.

Complications

The ATO imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay that amount to the ATO. Australian resident sellers can avoid the withholding requirement by obtaining and providing to the buyer a valid clearance certificate from the ATO. There are circumstances in which a foreign resident vendor may apply for a variation of the withholding rate.

Any person that is recorded as a registered owner of a property is required to obtain either a clearance certificate or variation to avoid the withholding requirement, subject to some exceptions. Bankruptcy is one of those exceptions. The bankruptcy trustee was not required to obtain a clearance certificate.

Under usual circumstances, an Australian resident is still required to obtain a clearance certificate as an individual, even when they hold their interest in the land as a trustee. 

Outcome

Due to the fact that Mr X (the trustee of the family trust) was bankrupt, he was captured by the exception.

Mrs X was still required to obtain an ATO clearance certificate.

Given the unusual circumstances and complicated land ownership described above, a “Complex Advice Request” was submitted to the ATO. The buyer insisted on each of the registered owners providing an ATO clearance certificate. The ATO advice satisfied the buyer’s requirements for evidence of each of the seller’s compliance with the requirements of the regime.

Key takeaways

  • Some assets are not subject to the requirements of the foreign resident capital gains withholding regime;
  • Bankrupt estates are captured by an exemption to the regime, but only in relation to the land owned of the bankrupt person;
  • If you are not sure whether you need to obtain an ATO clearance certificate, seek clear advice or direction from the ATO.

 

 


Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).

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