The new capital gains tax (CGT) withholding payment regime will impact real estate mortgagees.
How does it work?
From 1 July 2016 all purchasers of Australian real estate must withhold and remit to the ATO 10% of the purchase price if the vendor is a foreign resident subject to some exemptions. Sounds simple, but read on!
The new regime works on the presumption that all vendors are foreign residents until proven otherwise, and extends to indirect foreign ownership of real estate.
The key exemptions relevant to real estate sales are:
- real estate with a market value of less than $2 million; and
- if the vendor obtains a clearance certificate from the ATO (the ATO promises an automated process).
If no exemptions are available, the Commissioner of Taxation may vary the withholding amount, or reduce it to nil.
Impact on mortgagees
Remember, these risks only apply when the market value of the real estate is $2 million or more.
Financing a mortgagor. Incoming mortgagees face no immediate problems as there is no provision imposing a charge on the land if your mortgagor fails to deduct 10% when it purchases the property. However, the mortgagor may be pursued by the ATO for the 10% not deducted. If the mortgagor is directly or indirectly foreign owned, mortgagees will need to take account of the risk of a withholding on eventual sale - see below.
Outgoing mortgagees. A mortgagee hoping to receive 100% of the net sale proceeds could receive only 90% of the net proceeds if a purchaser decides to withhold 10%. The risk can be addressed by provisions in the sale contract (eg by ensuring a clearance certificate is provided). Mortgagees can of course elect not to release their security unless they receive the amount of money they stipulate.
Remember that indirect foreign ownership of a vendor may trigger the obligation to withhold. The withholding applies to all types of real estate transactions including company title and options. As usual, there is devil in the detail which is not described in this short summary.
Suggested practical approach for mortgagees
These rules onlyapply only when real estate is worth more than $2 million
Rule 1: When taking a new mortgage, check that the vendor to your customer is not a foreign entity so there is no ‘surprise’ liability on your customer to withhold 10%. One way is to always require a clearance certificate from the ATO.
Rule 2: If financing customers with foreign ownership, find out how the withholding will apply to net sale proceeds on re-sale.