- From 1 July 2016, any purchaser who acquires an Australian property with value of $2 million or more from a foreign resident vendor will be required to withhold and pay 10% of the purchase price to the Australian Taxation Office (ATO).
- This extends to the acquisition of certain indirect interests, options or rights in Australian property from foreign non-residents.
- There are considerable consequences for both purchasers and vendors.
- All vendors will automatically be treated as a foreign resident when selling an Australian property with market value of $2 million or above.
- Therefore Australian resident vendors must obtain a clearance certificate from the ATO and provide the certificate to the purchaser prior to settlement to avoid any amount from being withheld at settlement.
- real property in Australia – land, buildings, residential and commercial property
- lease premiums paid for the grant of a lease over real property in Australia
- mining, quarrying or prospecting rights
- interests in Australian entities whose majority assets consist of the abovementioned property or interests – this is called an indirect interest
- options or rights to acquire the abovementioned property or interest
- real property transactions with a market value under $2 million
- transactions listed on an approved stock exchange
- the foreign resident vendor is under external administration or in bankruptcy
The new withholding regime is now law and will apply to contracts entered into on or after 1 July 2016.
Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold 10% of the purchase price and pay that amount to the ATO. The withholding is a non-final withholding tax − it will be credited against the actual tax liability − and refunds or additional tax payments may arise.
While the withholding regime will protect the integrity of the foreign resident Capital Gains Tax (CGT) regime, it also applies where the disposal of such taxable Australian property by a foreign resident generates gains on revenue account and, as a result, is taxable as ordinary income rather than as a capital gain.
This withholding is limited to taxable Australian property:
There are a number of exclusions. If the foreign resident vendor falls within one of these categories then the 10% withholding is not applicable:
There is a presumption that a vendor of a direct interest in taxable Australian property is a non-resident. For real property transactions with a market value of $2 million or above, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO. This certificate can be provided to the purchaser on or before the settlement of the transaction. Where a clearance certificate is provided, the purchaser is not required to withhold an amount from the purchase price.
If the vendor fails to provide the certificate by settlement, the purchaser would be required to withhold 10% of the purchase price and pay this to the ATO. This means Australian resident vendors of real property with a market value of $2 million or above will need to apply for a clearance certificate and provide this to the purchaser before settlement to ensure no funds are withheld from the sale proceeds.
Indirect interests in taxable Australian property
The same regime applies to a vendor selling an interest in a unit trust or company where more than 50% of the underlying value of the entity is derived from direct interests in taxable Australian property. Here the vendor can provide a residency declaration that they are an Australian resident.
Alternatively the vendor can provide a declaration that the interest does not relate to a relevant indirect interest in taxable Australian property. The purchaser is entitled to rely on the declaration provided they do not know it to be false (the so-called ‘knowledge condition’).
Where the vendor is not entitled to a clearance certificate, but an affected party believes a withholding of 10% is inappropriate, that party can apply for a variation. It may be a vendor that applies for the variation (for example on the basis of no gain) or it may be a secured lender that wishes to retain moneys to pay off the secured debt rather than have to withhold and remit 10% to the ATO.
The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies. The ATO has discretion as to whether to allow a variation.
In due course the ATO will be announcing procedures to comply including online facilities. There will also need to be changes in conveyancing practices and contractual conditions in relation to relevant sales of property, shares in a company or units in a trust.
Please contact the Rigby Cooke Lawyers team if you have any queries regarding operating under this new regime.
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