Property Buyers and Sellers Beware. A new Withholding Tax Regime will apply from 1 July 2016 applying to sales of interests in Australian real property with value of $2 Million or more.
The tax can apply to:
- All Land and buildings;
- Mining quarrying or prospecting rights in Australia;
- Lease premiums paid for the grant of a lease over real property in Australia;
- Indirect interests in the above eg a company where land is the majority asset;
- Options or rights to acquire the above.
The Withholding Tax of 10% of the price of the property applies where the seller is a foreign resident.
However, the rules apply on a ‘guilty until proven innocent’ basis. That is, purchasers must assume the seller is a foreign resident unless they are provided with a Clearance Certificate.
Therefore Australian residents will be subject to the withholding tax unless they produce a valid Clearance Certificate.
The rules are designed to at least collect some tax on capital gains made by foreign residents. Since enforceability of Australian tax debts is difficult in foreign jurisdictions, the Government is collecting tax at the source. When the foreign resident discloses their capital gain in an Australian tax return, the 10% withholding tax will act as a credit against the true tax payable on any capital gain and any balance will be refunded.
Clearance Certificates are administered by the Australian Taxation Office (ATO). Either the landowner, a legal practitioner or a tax agent can apply for the certificate. Once issued, they last for 12 months.
Application can be made initially via an ATO paper form requiring details of the application and their residency status. The ATO plans to launch an online application site which will speed up the application process. We encourage any vendors expecting to settle property worth more than $2 Million in July 2016 to apply for a Clearance Certificate immediately.
Property Purchasers must withhold tax at 10% of the purchase price of any property above $2 Million unless they are presented with a valid Clearance Certificate containing the same name as the seller. Therefore withholding tax will form part of the settlement process.
Sellers of properties that are highly leveraged will need to communicate with their bank about expectations of finance payout upon settlement as it is the purchaser’s obligation to withhold tax from the settlement amount. Therefore, the ATO will rank ahead of a mortgage in this instance.
Where a seller can prove that the withholding tax of 10% is too high, they may apply to the ATO for a withholding variation of between 0% and 10%.
Should you have any questions about how this may affect you, or require assistance to apply for a Clearance Certificate, please contact your usual Hanrick Curran advisor or Jamie Towers on 07 3218 3900.
Please note that this publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.