The Australian government is ramping up efforts to collect tax from foreign residents selling property within Australia. Rather than relying on the vendor to comply, the recent Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 shifts the responsibility to the purchaser.
The new withholding regime introduces a 10% non-final withholding tax on payments made to foreign residents who dispose of certain taxable Australian property. It will apply to contracts entered into on or after 1 July 2016. Broadly, the purchaser will be required to withhold 10% of the purchase price and pay that amount to the ATO.
Australian resident vendors are required to obtain a clearance certificate in order to avoid the 10% non-final withholding. This requirement needs to be considered for all real property transactions over $2M.
Assets affected – taxable Australian property
The regime affects Australian taxable property disposed of by a foreign resident. Properties may include:
- Real property in Australia – land, buildings, residential and commercial property;
- Lease premiums paid for the grant of a lease over real property in Australia;
- Mining, quarrying or prospecting rights;
- Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest;
- Options or rights to acquire the above property or interest.
The new regime will not apply to:
- Real property transactions with a market value under $2 million (vast majority of residential house sales);
- Transactions listed on an approved stock exchange; or
- Situations where the foreign resident vendor is under external administration or in bankruptcy.
Penalty for failure to withhold
The penalty for failing to withhold is equal to the withholding amount – i.e 10% of the purchase price.
How will this be administered?
Three online forms, along with instructions on how to complete them, are now available at www.ato.gov.au/FRCGW. These are:
1. Clearance certificate application for Australian residents
The clearance certificate confirms that the withholding tax is not to be withheld from the transaction. Australian resident vendors are required to obtain a clearance certificate prior to settlement to avoid incurring the 10% non-final withholding.
The purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO. If the vendor fails to provide the certificate by settlement, the purchaser will be required to withhold 10% of the purchase price and pay this to the ATO.
The clearance certificate will be valid for 12 months and it must be valid at the time the transaction is entered into to avoid this withholding obligation.
2. Purchaser payment notification
The purchaser is required to complete a purchaser payment notification form to provide details of the vendor, purchaser and the asset being acquired to the ATO.
3. Variation application
Where the vendor is not entitled to a clearance certificate, but believes a withholding of 10% is inappropriate, the vendor can apply for a variation. The vendor completes the relevant form requesting a lesser withholding rate be determined by the ATO.
The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.
What this means for you
Although it’s still unclear how the new regime will play out, it definitely means a big change for purchasers, and their agents.
It can take up to 28 days to obtain a clearance certificate. As most contracts fall within a 30 day settlement, this means that applications for a clearance certificate must be lodged by day two of a contract in order for your Australian resident vendors to avoid the consequences of the regime.
If you require any assistance as this new regime unfolds, please contact us at 07 3223 6100. We have property and tax lawyers available to answer your queries.