The 2013/2014 Federal Budget included a proposal for buyers of certain “taxable Australian property” to withhold 10% of the sale proceeds and remit the amount to the Australian Taxation Office (ATO) where the seller is not an Australian tax resident. This measure is proposed to commence from 1 July 2016 and will have significant impacts for buyers of property covered by the proposed rules.
The proposed measure is set to apply where any of the following are transferred:
- A direct interest in real property situated in Australia (including a mining, prospecting or quarrying right to minerals, petroleum or quarry materials in Australia). However, an interest in a residential property that is transferred for less than $2.5 million is excluded from the proposed measures.
- A Capital Gains Tax asset that is used at any time in carrying on a business through a permanent establishment in Australia.
- An interest in an entity where the seller and their associates hold 10% or more of the entity and more than half of the value of the entity is attributable to Australian real property.
The primary driver behind the proposed measures is to capture some of the tax leakage that occurs when foreign residents fail to pay the Capital Gains Tax that should be paid on the sale of taxable Australian property.
Foreign residents will still be required to lodge an Income Tax Return in Australia where they have income from taxable Australian property. They will however have prepaid a portion of their tax liability where a sale occurs.
Although the proposed measures will exclude the majority of people purchasing residential properties from foreigners, complications remain for people acquiring property which is not exempt from the proposed measures. This is because they will need to determine whether the property being acquired is “taxable Australian property” and whether it is being acquired from someone who is not an Australian tax resident.
Where an entity fails to comply with withholding tax requirements they are liable to the ATO for the amount that should have been withheld. Given the complexity in determining whether these rules apply, it will be important that advice is sought prior to settlement. Failure to do so may result in the purchaser being liable for an additional 10% on top of the amount paid to the seller. They may also face the difficult prospect of attempting recovery action against an overseas entity.
Advisors of clients acquiring either direct or indirect interests in property from non-residents need to take particular care to ensure that any withholding is appropriately remitted in order to avoid the risk of the ATO commencing recovery action against the client for that amount that should have been withheld.
Should you want to know more about how these measures may impact you or a proposed transaction please contact your Pilot Advisor on (07) 3023 1300.