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New rules will apply to sellers of certain taxable Australian property under contracts entered into from 1 July 2016.
The new legislation imposes a 10% non-final withholding obligation on the purchaser of certain taxable Australian assets when they believe the vendor is a foreign resident.
Purchasers will be required to pay 10% of the purchase price to the ATO which may be withheld from the settlement payment they make to the vendor.
Australian resident vendors selling real property will need to obtain a clearance certificate from the ATO prior to settlement to ensure they do not incur the 10% non-final withholding tax.
Why have the changes been introduced?
Foreign residents are currently subject to CGT on capital gains made from the disposal of Australian assets, however, compliance with this requirement is extremely poor. The changes introduce a new collection mechanism for foreign resident CGT liabilities.
When does this change take affect?
The rules will apply where real property contracts are entered into on or after 1 July 2016.
What types of Australian property are affected?
The withholding tax is applicable on taxable Australian real property including vacant land, buildings, residential and commercial property with a market value of $2 million or more.
Impact on Australian Resident Vendors:
- Withholding tax does not apply to sales by Australian resident sellers, but these vendors will need to obtain a clearance certificate that they can provide to the purchaser.
- Solicitors and registered tax agents (not conveyancers) are permitted to obtain the clearance certificate on their client’s behalf from the ATO.
- Vendors can apply for a clearance certificate at any time, even before a property is listed for sale, and they are valid for 12 months.
Impact on Foreign Resident Vendors:
- Prior to the sale process, if the vendor knows he is going to make a loss i.e. will not have an income tax liability, the vendor can apply to the Tax Office for a variation of the 10% withholding tax amount.
- The variation issued by the Tax Office must be provided to the purchaser.
Impact on Purchasers:
- Purchasers must withhold 10% of the purchase price if they have not been provided with the vendors’s clearance certificate by the settlement date.
- The required amount must be paid to the ATO on or before the day the purchaser becomes the owner of the property. Payments to the Tax Office will be through an electronic payment method or potentially alternate methods including cheque.
- If the contract falls through then no withholding tax needs to be paid.
- There are penalties and offences already set out in the legislation where a payer does not withhold tax and send it to the Tax Office which will apply in this circumstance. Also, the purchaser will have to pay the tax even if they fail to withhold it from the vendor.
This is an important change that will apply to a significant number of real property transactions. We have not covered the full details of this wide-reaching new legislation here, and a great deal more can be found on the ATO’s website. For specific and comprehensive advice on your obligations as a property seller or purchaser please give myself or Angela Boyd a call to discuss on (02) 9908 9888.