In February 2016 the Australian Government introduced a 10% non-final withholding tax when foreign tax residents dispose of certain taxable Australian property, and it applies to contracts entered into on or after 1 July 2016.
Entities regularly involved in the sale and purchase of relevant assets need to consider how the regime will apply to their future transactions as purchasers and vendors.
The new rules aim to assist in the collection of tax from foreign residents and make sure they meet their tax obligations in Australia. The purchaser is required to withhold 10% of the purchase price, report and pay the amount to the Australian Taxation Office (ATO) on or before settlement. If an amount has been withheld, the vendor will be required to file an annual Australian income tax return in order to recover the 10%.
According to the ATO, the withholding applies to taxable Australian property, which includes:
- real property in Australia – land, buildings, residential and commercial property situated in Australia, otherwise known as Taxable Australian Real Property (TARP)
- 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 (indirect interest)
- options or rights to acquire the above property or interest.
Certain transactions are excluded from the withholding obligation, most notably real property transactions with a market value of less than AUD $2m.
For transactions involving TARP, the purchaser has an obligation to withhold unless the vendor obtains a clearance certificate from the ATO confirming they are an Australian tax resident. For assets other than TARP, an obligation to withhold arises if the purchaser knows or reasonably believes the vendor to be a foreign resident, however the purchaser may rely on a residency declaration from the vendor confirming their residency.
Although the new rules are aimed at foreign residents, the change can affect both residents and foreign residents. Australian resident entities that sell such assets must also produce a residency declaration, or apply for a clearance certificate from the ATO to make sure amounts are not withheld from the sale proceeds. However, until entities adapt to the new system, issues may arise where no provision is made for withholding tax in the contracts of sale, no clearance certificate is provided, and ultimately no tax is withheld on settlement.
Along with individuals and entities involved in the purchase or disposal of relevant taxable Australian property with a market value of $2m or more, (either as purchasers or vendors) the regime also impacts professionals such as real estate agents, conveyancers and solicitors, who assist to facilitate the sale of relevant assets. The standard practice for all conveyancing and the selling process for other assets that are caught under the legislation are also affected. For assets that are TARP, obtaining an ATO clearance certificate should now be part of the settlement process.
The affected entities will need to prepare and adjust their conveyancing and the selling processes, to deal with the potential withholding tax including:
- amending the standard sale contracts to include residency declarations
- the requirement to supply an ATO clearance certificate, and
- other provisions relevant to the new withholding measures.
It would also be prudent to include special conditions in the sale contract in the event of any delays of such documents.
As the rules place the onus for withholding on the purchaser, the requirement for residency declarations or the application for a clearance certificate can result in administrative costs and delays in the ability to settle transactions, if it is not managed from the outset.
Entities should consider how the legislation will affect the sale of taxable Australian property, whether that is from an isolated transaction or a regular business activity.