New rules to prevent foreign residents avoiding tax when they sell Australian property will affect everyone buying or selling property with a market value of $2 million or more from 1 July 2016. Many transactions involving shares in a company or units in a trust will also be caught.
From 1 July, a 10% withholding tax will apply when foreign residents sell certain types of Australian property. However, the new rules assume all property sellers are a non-resident unless you have a clearance certificate from the ATO. Without this clearance certificate, the purchaser can withhold 10% of the purchase price and pay this to the ATO. For purchasers, if you do not withhold the tax and do not have a clearance certificate, you are liable for the tax (on a $2 million property, that's $200,000).
You can probably already see the problem here. Until everyone gets used to this new system there are likely to be quite a few issues where property contracts don't mention the withholding tax, no clearance certificate is provided, and no tax is withheld on settlement.
The good news is that the withholding tax does not apply to property (including residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests) that has a market value of less than $2 million.
Where there is more than one purchaser, the market values of all of the interests need to be aggregated to determine whether the $2 million threshold applies. For example, if mum and dad are buying a property as joint tenants with a total market value of $3 million, the rules could be triggered even though their individual interest in the property is only worth $1.5 million.
The $2 million exclusion does not apply to indirect interests in Australian property such as shares in a company or units in a trust that hold property in Australia. However, the exclusion can apply to company title arrangements, where someone holds shares in a company which provides them with a right to occupy part or all of the property that is owned by the company. This ensures that company title arrangements are treated in the same way as properties held under strata title.
The other main exception is when the foreign resident vendor is under external administration (for a company) or is bankrupt (for an individual). This is to ensure that the withholding tax rules do not disturb the priority of other creditors.
The new withholding rules capture:
If you are selling property affected by the new rules after 1 July and that property is likely to have a market value of $2 million or more, you need to apply for a clearance certificate from the ATO. Without this certificate, the purchaser of your property must assume you are a foreign resident and will be permitted to withhold 10% of the purchase price and remit it to the ATO.
When a certificate is issued by the ATO it remains valid for 12 months. The ATO has been developing an automated process for issuing a clearance certificate. The vendor (or an agent) will be able to complete an online application form. In straightforward cases the ATO expects that certificates will be issued within a matter of days.
If you are buying property affected by the new rules after 1 July and that property has a market value of $2 million or more, you need to ensure that you receive the clearance certificate from the vendor before settlement occurs. While the tax rules allow you to withhold 10% of the purchase price if the clearance certificate is not provided, it might also be a good idea to have this built into the sale contract to avoid any uncertainty.
If the sale proceeds and you don't have a clearance certificate and have not withheld the tax, the tax liability rests with you, the purchaser.
If you are buying or selling shares in a company or units in a trust then a withholding obligation can also be triggered, even if the company or trust does not hold any property interests in Australia. In this case the process of validating whether or not a withholding obligation exists is slightly different.
Withholding will be required if either:
In these circumstances the vendor can make a declaration to the purchaser confirming that they are an Australian resident to ensure that the withholding tax does not apply. In general you would expect to see these declarations in the sale agreements as warranties.
A vendor can also make a declaration confirming that shares in a company or units in a trust are not classified as an indirect Australian property interest. Shares or units that are not classified as an indirect Australian property interest and do not relate to company title arrangements are outside the scope of the withholding rules.
The Commissioner has the power to vary the amount that is payable under these rules. Either a vendor or purchaser may apply to vary the amount to be paid to the ATO. This might be appropriate in cases where:
If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser before settlement occurs.
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