Buying or selling property? A new tax could impact you
People that are buying or selling property from 1 July 2016 need to be mindful of the new foreign resident withholding tax.
Once the new tax has been introduced, anyone purchasing Taxable Australian Property from a relevant foreign resident will be required to withhold 10% of the property’s purchase price and remit this to the ATO. The purchaser will also be required to submit a ‘Purchaser Remittance Form’ and provide the ATO with details of the vendor, purchaser and asset.
If the purchaser fails to comply with the relevant withholding tax requirements they will face a penalty equal to the amount that should have been withheld.
The tax withheld is not a final tax. The vendor may submit a tax return and obtain a credit for the tax to offset against any particular tax liability which does arise. Importantly, there may be a significant time-lag between the property sale and return lodgement and actually receiving a refund from the ATO. This could impact on cash-flows and bank settlements in relation to release of any mortgages.
To avoid qualifying as a relevant foreign resident, the vendor must obtain a residency certificate from the ATO. If a vendor doesn’t provide such a certificate the buyer must withhold and remit 10% of the purchase price to the ATO on the day of settlement.
A residency certificate can be applied for at any time and should be valid for 12 months.
If a vendor is unable to obtain a residency certificate (i.e. because they are a foreign resident), the vendor, purchaser or a creditor with a security interest over the asset may apply for a variation of the amount to be withheld. Reasons for a variation could include:
- The foreign resident will not make a capital gain on the transaction;
- The foreign resident will not have an income tax liability
- There are multiple vendors, only one of which is a foreign resident.
There are certain exceptions from the withholding rules, notably for Australian real property valued at less than $2m. Taxable Australian Property includes:
- Real property (i.e. land, buildings, residential and commercial property) situated in Australia;
- Mining, quarrying or prospecting rights if the minerals, petroleum or quarrying rights are situated in Australia.
Where the Taxable Australian Property is being acquired indirectly (e.g. by a purchaser acquiring a company which owns the real property) and more than half of the value of the entity comprises real property or mining, quarrying or prospecting rights, then a withholding obligation can also apply. There are different exemption criteria applicable in these circumstances which will need to be carefully considered.
These changes place a significant burden on purchasers going forward and vendors will need to be aware of the relevant requirements to ensure amounts are not withheld unexpectedly and to ensure no delays in settlement.
Contact our specialist taxation team in Sydney on (02) 8346 6000 or Newcastle on (02) 4962 2644 for assistance or to discuss if this will impact you.