From 1 July 2016, if you buy Australian property from a foreign resident you may have to withhold some of the purchase price and remit it to the Australian Taxation Office as part of a new regime designed to assist in the collection of the seller’s capital gains tax (CGT) liability.
The withholding tax rate will be 10% of the total purchase price.
The obligation to withhold will only apply if the market value of the property is $2 million or more. Where there are multiple buyers, the obligation to withhold will apply where the sum of all of the buyers’ interests is $2 million or more.
Buyers, or conveyancers working on their behalf, will need to fill out a mandatory ‘foreign resident withholding purchaser remittance form’ and remit the withholding tax.
Buyers will be liable for any shortfall if they fail to withhold and remit the correct amount. They will need to maintain records with the declaration or clearance certificate of a seller’s residency status and retain receipts of amounts withheld.
The obligation to withhold will be triggered if the buyer knows or has reason to believe the seller is a foreign resident. Determining whether someone is or is not an Australian resident for tax purposes is not always simple.
There will be no obligation to withhold if the seller has obtained a clearance certificate from the Commissioner of Taxation or provides the buyer with a declaration that the seller is an Australian resident.
From the seller’s point of view, the withholding tax won’t represent their final CGT liability. The seller will still be required to lodge an income tax return and will receive an assessment either requiring payment of any outstanding shortfall or obtain a refund to the extent that the credit for the tax withheld exceeds their assessed income tax liability.
The types of Australian assets covered by the new regime will be broad. Taxable Australian real property is captured by the regime and includes directly held interests in Australian property such as residential premises, commercial property, vacant land, leasehold, easements, covenants, mortgages and stratum title schemes. Indirect Australian real property interests are also captured (e.g. where the property is held within an entity being sold) as well as options or rights to acquire such property or interests.
Specific exclusions from the new regime will apply where:
- the asset is a membership interest (e.g. shares in a company) and the seller has made a declaration that it is not an indirect Australian real property interest;
- the transaction is conducted on the stock exchange or on a broker-operated crossing system;
- there are other withholding obligations under the transaction; or
- the seller is bankrupt or under external administration.
Compliance with the new regime won’t be simple. Not all lawyers and conveyancers have updated their contracts for sale and other relevant commercial agreements in readiness for the new regime.
It is critical to ensure that all agreements involving the purchase of property from a seller where the buyer knows or has reason to believe is a foreign resident contain all necessary provisions that will enable the buyer to correctly comply with its withholding obligations under the new regime.
As a minimum, relevant contracts should include a provision enabling the buyer to withhold 10% of the total purchase price and suitably worded warranties and undertakings from the seller relating to the provision of a clearance certificate or declaration of Australian residency.
The new regime comes into force as part of the Tax and Superannuation Laws Amendment (2015 Measures No 6) Act 2016, which received assent 25 February 2016.