Amendments to Australian tax law have imposed a new 10 per cent non-final withholding obligation on the purchaser of interests in Australian real property (whether direct or indirect) when acquired from a foreign resident. The new measures will generally apply from 1 July 2016.

Background

On 25 February 2016 the Australian Government enacted legislation that introduced a 10 per cent non‑final withholding tax to foreign residents on the disposal of certain direct and indirect interests in Australian real property. The regime is to apply to contracts entered into on or after 1 July 2016.

The purpose of the regime is to assist in the collection of foreign residents’ capital gains tax (CGT) liabilities

Key features

Under the new law, where a foreign resident disposes of certain Australian real property interests, the purchaser will be obliged to pay 10 per cent of the purchase price to the Australian Taxation Office. This amount is payable on or before the day the purchaser becomes the owner of the asset.

The new withholding obligations apply to taxable Australian property. This includes, but is not limited to:

  • Real property in Australia (e.g. land and buildings)
  • Lease premiums paid in relation to a lease over Australian real property
  • Options or rights to acquire Australian real property

It is important to note that whilst the regime seeks to preserve the integrity of the foreign resident CGT regime, the withholding regime will apply to the disposal of taxable Australian property by a foreign resident, even if the disposal is on revenue account (and otherwise assessable as ordinary taxable income).

There are certain carve outs to the obligation to withhold. Most notably, the new withholding mechanism will not apply to transactions involving interests in Australian residential premises (whether direct or indirect) valued at less than $2 million.

Furthermore, the ATO can issue a notice in writing varying the amount payable under these rules. The buyer, seller or a secured creditor (but not an unsecured creditor) can apply to the ATO for a variation and any variation notice must then be given to the buyer. The intention is that the amount payable will be varied to a lesser amount. However, the ATO does have the power to vary the amount payable to a greater amount. 

Impact on foreign resident vendors

Whilst the obligation to withhold lies on the purchaser, foreign resident vendors should be aware of the withholding obligations. They should ensure that the relevant sale agreements account for the purchaser’s obligations under the new law. It is also important to note that the 10 per cent withholding amount is a non-final tax amount. This means that the 10 per cent withholding amount is collected by the purchaser as an arbitrary estimate of the foreign resident's  final tax liability. To this end, the foreign resident would still be required to lodge an Australian tax return (assuming there is Australian assessable income) and then claim a credit for the amount of tax the purchaser withheld.