First proposed in May 2013, the idea that buyers of certain property in Australia would withhold 10% of the purchase price from foreign resident vendors and instead remit the amount to the Australian Taxation Office (“ATO”) has been passed by Parliament.
Although the commencement of the legislation is not until 1 July 2016, consideration should be given to the new legislation and its application to contracts which settle on or after that date (even if they are entered into before 30 June 2016).
The assets which may be subject to the 10% withholding are Capital Gains Tax assets that are:
- Direct interests in real property located in Australia; or
- Indirect interests in Australian real property (an interest of 10% of more in an entity whose value is principally attributable to Australian real property); or
- Mining, quarrying or prospecting rights to minerals, petroleum or quarry materials situated in Australia; or
- An option or right to acquire either of the above.
Exemptions from Withholding
There are a number of exemptions from the new regime, the key ones including:
- The market value of most Australian real property (including some indirect interests, residential premises, commercial property, leasehold, mortgages, stratum title schemes and vacant land) is less than AU$2 million; or
- The vendor provides an appropriate clearance certificate or residency declaration; or
- The transaction is on an approved stock exchange.
Importantly, withholding will be required for acquisitions of most Australian real property where the purchase price is AU$2 million or more, unless a clearance certificate is provided by the vendor regardless of whether you believe or know the vendor is an Australian resident.
The ATO is implementing an online application process for issuing clearance certificates and in straightforward cases it is expected that the clearance certificate would issue within 14 days.
- The foreign resident will not make a capital gain;
- The foreign resident will not have an income tax liability in Australia;
- There is likely to be insufficient proceeds to cover the withholding and outstanding debt over the asset; or
- There are multiple vendors and not all are foreign residents.
Payment of any amounts withheld must be made to the ATO on or before the day you become the owner of the asset. The ATO must also be notified in the approved form.
Nature of the Withholding
The amount withheld is a non-final withholding tax. The foreign resident will be required to lodge an Australian income tax return in relation to the sale at which point any amounts withheld will reduce any Capital Gains Tax payable on the disposal of the asset or be refunded.
If you are buying or selling an interest in Australian property please contact Murray Howlett, Josh Meggs or Kylee Smith from our Taxation Services Division on (07) 3023 1300 to determine the application of this regime to your circumstances.