From 1 July 2016, changes will come into effect to Australia’s withholding tax rules that may require purchasers of Australian real property to withhold 10 percent of the purchase price and pay this directly to the Australian Taxation Office (ATO). Broadly, the new withholding regime will:
- apply where the vendor is a foreign resident, but will have practical implications for all Australian real property transactions with market value $2 million or greater
- apply to all types of Australian real property (residential, commercial, industrial, etc.)
- apply in all states of Australia
- not change any GST or duty calculations on acquisitions of Australian real property
- also impact acquisitions of interests in landholding companies and trusts, and options to acquire Australian real property or interests in landholding companies and trusts.
If a purchaser fails to withhold and pay this amount to the ATO, penalties and interest will apply.
Implications for purchasers
For all acquisitions of Australian real property with market value $2 million or greater, purchasers will need to obtain a clearance certificate from the vendor confirming the vendor’s status as an Australian resident for tax purposes. If a clearance certificate is not obtained, purchasers will be required to withhold 10% of the purchase price and pay this directly to the ATO.
Implications for vendors
Australian resident vendors of Australian real property with market value $2 million or greater will need to apply online for a clearance certificate confirming their status as an Australian resident for tax purposes. The ATO will be automating this process and expects clearance certificates to be issued within 1 – 14 days in straightforward cases, with a longer processing time for more unusual or higher risk cases. Clearance certificates can also be obtained in anticipation of a transaction (even prior to listing a property for sale) and will be valid for 12 months.
If no clearance certificate is provided, the purchaser is required to withhold 10 percent of the purchase price, meaning the vendor will only receive 90 percent of the purchase price. This is effectively a ‘prepayment’ of tax and a credit for the amount withheld (and paid to the ATO) is able to be claimed in the vendor’s income tax return.