Foreign resident property disposal tax update
Posted 02 Mar 16
Summary of the new rules:
- Purchasers of taxable Australian property from non-resident vendors are required to withhold 10% of the total consideration for the transaction and remit the amount to the ATO unless specific exceptions apply.
- This applies to contracts entered into on or after 1 July 2016
- The withholding obligation lies with the purchaser and applies to all direct and indirect interest in taxable Australian property if exceptions (see below) do not apply.
Taxable Australian Property
Foreign residents are only subject to tax in Australia if they dispose of Taxable Australian Property. If an asset disposed by a foreign resident is not considered to be a Taxable Australian Property, gains derived are not subject to tax in Australia.
Taxable Australian Property is defined as real property situated in Australia (including a lease of Australian land) or mining, quarrying or prospecting rights for minerals, petroleum or quarry materials situated in Australia.
Indirect Australian real property interest is also caught under this measure. Broadly, this includes interests of 10 per cent or more in an entity whose value is derived from taxable Australian real property.
Further transactions including disposal of an asset used in carrying on a business through a permanent establishment in Australia and options or rights to acquire any of the above assets/ interests are also subject to the new rules.
Who do they Impact?
This measure was introduced as the Federal Government claims voluntary compliance by foreign residents has been low and Mareva injunctions (freezing orders) have proven ineffective.
From 1 July 2016, foreign residents disposing of qualifying taxable Australian real property will have 10% of their proceeds withheld by purchasers and remitted to the ATO on or before the day of settlement. Foreign residents will therefore be required to lodge an income tax return to claim the credit from the withholding tax remitted to the ATO.
How will the purchaser determine if the vendor is a foreign resident?
The purchaser may rely on any declaration by the vendor to determine their residency status. The withholding obligation arises if the purchaser knows or reasonably believes the vendor is a foreign resident, for example, where the purchaser is required to make payment to an offshore account or the vendor provided an overseas address.
We anticipate purchasers will find it difficult to determine if the vendor is a tax resident or a foreign resident. In the event the transaction includes multiple vendors, the purchaser will need to seek a declaration from all vendors.
We understand the ATO is currently in the process of implementing an automated process for issuing clearance certificate from withholding. This process requires a vendor (or their agent) to complete an online application form. It is proposed that the clearance certificate will remain valid for 12 months.
Vendors may also apply for a variation request where they believe it is not appropriate for the ATO to withhold the 10%. The ATO envisage the request for variation will be processed within 28 days. The vendor will need to show the purchaser the variation notice prior to settlement.
Further to receiving a clearance certificate, the purchaser will not be required to withhold if any of the following apply:
- The market value of the CGT asset is less than $2million;
- The transaction is on an approved stock exchange; or
- The transaction is already subject to withholding until another tax law provision.
To discuss how these changes may impact your situation contact Tim Bow or the PKF tax team for further information.