The new regime is aimed at foreign residents who sell Australian property, requiring 10 percent of the sale price to be withheld.
It is a significant change in tax law and applies to real estate; interests in Australian entities whose majority assets consist of real estate; and options or rights to acquire such interests.
Perhaps the key aspect of the new tax is that it effectively shifts the tax collection and remittance of the 10 percent withholding tax to purchasers of property.
While it does not apply to the sale of properties with a market value under $2 million or shares listed on an approved stock exchange, it still has a number of implications for both Australian and foreign vendors and purchasers of real estate if not managed appropriately.
Anyone who purchases property from foreign residents will potentially be obliged to act as “tax collector” on behalf of the Australian government.
Accordingly, we expect many purchasers to demand a “clearance certificate” from vendors prior to settlement, to prove the vendor
is an Australian resident, or else an approved ATO variation notice if the vendor is a foreign resident but believes the withholding tax is inappropriate in their situation.
If the 10 percent withholding tax is applicable, purchasers will be required to complete an online ‘Purchaser Payment Notification’ form to provide details of the vendor, purchaser and the asset being remitted to the ATO.
Purchasers must pay the withheld amount on or before settlement.
Australian residents may need to provide proof to a purchaser that they are not a foreign resident and therefore not liable for the withholding tax.
The ATO can provide a ‘clearance certificate’ which vendors can give to prospective purchasers to confirm their Australian residency status.
Clearance certificates are valid for 12 months and people can apply for one at any time they are considering selling their property, including prior to listing for sale. With sufficient planning, we would recommend this as the preferred approach.
Foreign residents subject to the new withholding tax requirements can apply for a variation to reduce the amount of the tax if they believe that 10 percent is inappropriate (for example because the property will be sold at a capital loss). This variation can be done via an on-line form from the ATO.
It is important the notice of variation is provided to the purchaser before settlement to ensure the reduced withholding rate applies.
In addition, this new regime operates as a “non–final withholding tax.” This means foreign residents are still required to submit an Australian tax return reflecting the sale of the property and the 10 percent amount withheld will be factored into the final tax payable (or refundable) to vendors.
Josh Chye, HLB Mann Judd