Exposure Draft Legislation to introduce a 10% non-final withholding tax on the disposal, by foreign residents, of certain taxable Australian property has been released for consultation. The intended purpose is to assist in the collection of foreign residents’ capital gains tax (CGT) liabilities.

The current CGT rules for foreign residents

The CGT rules operate to disregard  a capital gain or capital loss made by a foreign resident unless the relevant CGT asset is “taxable Australian property.” If a foreign resident has derived such Australian assessable income, the foreign resident must lodge a tax return and assessments proceed in the usual course.

The Australian Taxation Office considers voluntary compliance with this requirement to be extremely low.  In response to this, on 6 November 2013 the Federal Government announced that it would introduce new measures to assist in the collection of such tax.

Proposed new law

The draft legislation proposes that a purchaser must pay an amount equal to 10% of the total purchase price to the Commissioner and may withhold the same amount from the payment made to the vendor, if the following conditions are satisfied:

  • the purchaser acquires an asset that is taxable Australian real property (this broadly includes real property situated in Australia and certain mining rights), an indirect Australian real property interest or an option or right to acquire such property or interest;
  • the vendor is a relevant foreign resident, being a person who the purchaser has reason to believe is a foreign resident and who has not made a relevant declaration; and
  • the transaction is not an excluded transaction, being a transaction involving residential property valued less than $2.5 million, an arrangement conducted through the stock exchange and an arrangement that is already subject to an existing withholding obligation.

The amount paid to the Commissioner is not a final tax. Instead, the amount will be credited against the foreign resident’s Australian tax liability once a tax return has been lodged.

Whilst there is no obligation to withhold as such, the obligation to pay the amount to the Commissioner is described as a withholding obligation because the payment amount may be withheld from the vendor.

The amendments are proposed to apply to CGT assets acquired on or after 1 July 2016.

Implications

If enacted, the new legislation will have implications both for foreign residents who intend to dispose of certain Australian assets and purchasers who intend to acquire certain Australian assets.

It will be important for purchasers to consider whether they have reason to believe that a vendor is a foreign resident, and if so, for appropriate steps to be taken.