Recent changes to the tax legislation will require a purchaser to withhold and pay 10% of the purchase price to the ATO in certain circumstances. The new withholding regime will apply to a wide range of transactions relating to real estate, shares in companies and units in unit trusts.
The rules are designed to collect tax from foreign residents that make gains from selling taxable Australian property. However, the obligation on purchasers to withhold has a far broader application.
How will the withholding provisions operate?
Purchasers of Australian real estate will be required to withhold unless:
- the market value of the real estate interest being sold is less than $2 million; or
- the seller obtains a clearance certificate from the ATO.
There are other exemptions, but these are narrow. Generally, anyone purchasing real estate valued at more than $2 million will have to ensure that the seller provides a valid clearance certificate before settlement.
Purchasers of shares in a company or units in a unit trust will be required to withhold unless:
- the purchase is via an approved stock exchange; or
- the shares or units are not ‘indirect real property interests’; or
- the purchaser reasonably believes that the seller is an Australian resident for income tax purposes; or
- the seller provides the purchaser with a declaration stating that they are either not foreign residents or that the shares or units are not indirect property interests.
As with purchases of real estate, there are narrow exemptions.
Importantly, in the case of shares in a company or units in a unit trust, there is no $2 million threshold. Unless the seller provides a declaration to the purchaser, the risk of having to pay withholding tax of 10% to the ATO – in addition to the purchase price – is with the purchaser.
Agreements will need to be prepared that manage this risk.
When does this start?
The new withholding provisions will apply to sale agreements entered into on or after 1 July 2016.
However they will also apply to option arrangements entered into before 1 July 2016 where the exercise date of the option is after 1 July.