What is it?
From 1 July 2016 new legislative changes will take effect in relation to capital gains by foreign residents disposing of certain taxable Australian property. This is a brief guide on the new legislation and how it affects you.
The government is introducing a measure whereby 10% of the purchase price of a property is withheld from a foreign resident vendor of certain Australian property. This amount is remitted by the purchaser directly to the Australian Taxation Office (ATO) as a non-final withholding tax. This ensures that foreign resident vendors who would not otherwise lodge a tax return will not be able to avoid their taxation obligations in Australia.
Who does it affect?
Although the measure is targeted towards foreign resident vendors, in practice ALL vendors as well as purchasers of the relevant types of property will be affected, regardless of whether the vendor is a foreign resident or not.
What type of property does it affect?
The measure applies to both direct and indirect property holdings in Australia, and includes:
- Taxable Australian real property with a market value of $2 million or more;
- This includes vacant land, buildings, residential and commercial property;
- Mining, quarrying or prospecting rights where the material is situated in Australia;
- Lease premiums paid for the grant of a lease over real property in Australia;
- Indirect real property interests in Australian entities whose majority of assets consists of the above asset types; and
- Options or rights to acquire any of the above asset types.
The majority of residential property sales would not be affected as they do not meet the $2 million threshold. Other exclusions also apply to certain types of assets and transactions. Please contact us for further advice on these assets and transactions.
How is it implemented?
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 provides the purchaser with a clearance certificate from the ATO. The certificate can be provided to the purchaser at or before settlement. 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.
Australian resident vendors 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. Only Australian residents for tax purposes will be able to obtain a clearance certificate.
The vendor can apply for this certificate at any time they are considering the disposal of real property, including before the property is listed for sale. The certificate is valid for 12 months and must be provided to the purchaser before settlement to avoid the 10% withholding.
Is the vendor a foreign resident?
A foreign resident in the context of this measure refers to an individual or company that is not an Australian resident for taxation purposes. There is a range of criteria for determining whether you are a foreign resident, including but not limited to whether your ordinary place of residence is in Australia. If the vendor provides a valid clearance certificate, the purchaser is entitled to rely on that and does not need to question the vendor’s residency.
When does it need to be paid?
The purchaser must pay the amount withheld directly to the ATO at or before settlement. Failure to do so will incur penalties for the purchaser.
What happens to the withholding payment?
For ATO’s treatment of the withholding payment, please refer to the ATO’s website.
For further information about how the new measures affect you, please contact us.