The Government as of 1 July 2016 will require Australians, purchasing property over $2M to withhold 10 per cent of the sale price and pass that money to the Australian Tax Office.
Purchasers of property will now become Australia’s tax collector to support the operation of the foreign resident capital gains tax regime by catching the tax at the point of sale.
Where the seller is Australian the withholding by the purchaser will not be required.
But it will be up to the purchaser to establish whether the person they are buying the property from is a foreign resident and whether the transaction involves Australian located property.
And penalties may apply if the purchaser ignores this requirement and fails to prove that the vendor is not a foreign resident
To what property do the new rules apply ?
Where the market value is over $2M;
- Any real property in Australia including vacant land, buildings, residential and commercial property
- Properties sold regardless of whether or not subject to GST and using the GST going concern exemption
- Mining, quarrying or prospecting rights where the material is situated in Australia
- Lease premiums paid for the grant of lease over real property in Australia
- Indirect interests in property:
- such as land rich trusts and companies; or
- options or rights to acquire any of the above property
What property is excluded from the new rules?
- Transactions conducted through an approved stock exchange
- Transactions subject to another withholding obligation
- Securities lending arrangements
- Transactions where the vendor is in external administration
What does this mean for the Buyer of real property
- The changes will affect most purchases of property in Australia from 1 July 2016
- Buyers of taxable Australian property over the value of $2 Million will need to pass on 10% of the purchase price directly to the ATO as a non-final withholding
- This obligation arises regardless of whether the vendor is a foreign resident or not
- Where a valid clearance certificate is provided by the vendor, the purchaser is not required to withhold an amount from the purchase price
- If the purchaser does not withhold 10% of the purchase price and has not been presented with a certificate, the purchaser will face a penalty to the value of the amount which was supposed to be withheld
- If no clearance certificate is obtained, register for withholding tax and pay 10% across to the ATO upon settlement
Note: The obligation for the purchaser to withhold an amount and pay it to the ATO is not an additional payment on top of the agreed purchase price.
The withholding amount is taken from the amount of purchase price that the purchaser has agreed to pay the vendor.
What does this mean for the Seller of real property
- Where an Australian resident intends to sell their property they will be required to apply to the ATO and obtain a clearance certificate so that they receive the full selling price at source
- In straight forward cases, where all the required information has been sent to the ATO, the application will be approved and a clearance certificate will be issued within 1-14 days
- To alleviate any hold ups this may cause on settlement it would be wise for the vendor to obtain a clearance certificate at the outset as the certificate is valid for 12 months
- Consider the contract and how to account for the 10% withholding tax to ensure the full payment upon settlement occurs
- For asset types other than Australian real property to which the new rules apply, the vendor may provide the purchaser with a vendor’s declaration specifying that withholding tax is not required. There are two types of vendor declarations:
- Residency declaration
- Not an indirect Australian real property interest
- Where the vendor is not entitled to a clearance certificate and a vendor’s declaration is not appropriate, but believes a withholding of 10% is inappropriate, the vendor can apply for a variation.
- The vendor completes an on-line ‘Variation application for foreign residents and other parties’ form requesting a lesser withholding rate be determined by the ATO.
- In the majority of cases the variation will be provided within 28 days.
- The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.
On 31 July 2016, The Barron Family Trust enters into a contract to purchase a commercial property in Osborne Park for $4 million as a going concern, with settlement proposed to occur on 31 October 2016. The trustee does not know whether the vendor is a foreign resident. The vendor fails to provide a clearance certificate from the ATO to the settlement agent.
As the Barron Trust is acquiring Australian located real estate with a market value greater than $2 million and the Trustee has not received a clearance certificate from the vendor by the time settlement occurs, The Trustee will be required to withhold and pay to the ATO $400,000. The net of $3,600,000 is paid to the vendor. This is the case whether or not the vendor is an Australian resident.
- The responsibility for tax collection will fall on the potential unaware buyer.
- It is the buyer’s responsibility to request a clearance certificate from the seller.
- We envisage in the early days many buyers seeking out their family home are likely to not be aware of these new rules and the obligations placed on them at a minimum resulting in delayed settlement and at worse facing penalties.
- Real estate and settlement agents will play an important role in advising their clients in ensuring such clearances are in place.
This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
No responsibility can be accepted for those who act on the contents of this publication without first contacting us and obtaining specific advice.
Liability limited by a scheme approved under Professional Standards Legislation.