Article current as at 1 July 2016
In February this year new ‘withholding’ tax legislation was introduced in order to assist with the collection of foreign residents’ Australian tax liabilities.
From 1 July 2016 the new foreign resident capital gains withholding tax regime will apply to sellers entering into contracts for the sale of direct or indirect interests in real property with a market value of $2 million or more (this also includes options).
These transactions will require both Buyers and Sellers to undertake additional steps, and ultimately may require an amount equal to 10% of the purchase price to be withheld at settlement, and paid to the ATO.
If the Seller is an Australian Tax Resident
It is the Sellers responsibility to obtain a valid clearance certificate from the ATO before settlement in order to ensure that they do not incur the 10% non-final withholding tax. The clearance certificate must be in the same name on the Certificate of Title. A clearance certificate is valid for 12 months from the date of issue and so should be obtained early on in the sale process.
If the Seller is NOT an Australian Tax Resident or is an Australian Tax Resident who fails to obtain a Clearance Certificate
Where the Seller is not an Australian tax resident, or is an Australian tax resident who fails to obtain a Clearance Certificate, then the 10% non-final withholding tax must be withheld from the purchase price at settlement. A foreign resident Seller may apply to the ATO for a variation of the withholding rate where the Seller will not make a capital gain on the transaction or where the withholding is greater than the expected tax liability on the sale of the property. A credit may be claimed for the amount paid to the ATO in the Sellers tax return once the capital gains tax is assessed.
Implications for Buyers
It is the Buyers responsibility to withhold the 10% non-final withholding tax from the purchase moneys due at settlement and to pay it to the ATO within the specified timeframe. If an Australian tax resident Seller has obtained a clearance certificate prior to settlement, then the Buyer is able to rely on that certificate, and is not obliged to withhold the funds.
There are penalties for Buyers who fail to comply with their obligations under the new regime.
The nature of conveyancing across Australia is changing with a stronger legislative framework being introduced to protect Buyers, Sellers and other stakeholders who enter into these kinds of transactions. As a result, conveyancing processes are becoming increasingly more complex, and now so more than ever, it is essential that parties obtain suitably qualified legal advice early on in property transactions.
If you or someone you know would like to find out more information on the new withholding tax regime or conveyancing in general, please contact Emma Bragg on (02) 6140 3623 or email [email protected].