To ensure Australia captures as much tax as possible from property transactions a new withholding tax has been introduced and will apply to contracts entered into on or after 1 July 2017.
Under the new provisions where a foreign resident disposes of:
- Taxable Australian Real Property (“TARP”);
- An Indirect Australian Real Property Interest (“IARP”) ; or
- An option or right to acquire such property or such an interest
The purchaser must remit 12.5% of the cost base (referred to below as purchase price) to the Commissioner of Taxation (“the Commissioner”).
- Real property (including a lease) within Australia
- Mining, quarrying or prospecting right within Australia
Whereas IARP is a greater than 12.5% interest in a company whose value is predominantly made up of TARP assets.
Automatic exclusions for this withholding tax:
To minimise compliance costs withholding tax will not apply to:
- Real property transactions with a market value < $750,000
- Transactions conducted through a stock exchange or crossing system
- Arrangements already subject to another form of withholding, or
- Transactions involving vendors subject to formal insolvency or bankruptcy proceedings
Withholding tax will also not apply where the vendor provides the purchaser with a clearance certificate issued from the ATO. For real property transactions with a market value > $750,000 the purchaser must withhold 12.5% of the purchase price unless the vendor provides a clearance certificate.
Australian resident vendors who are disposing of real property valued at more than $750,000 will need to apply for a clearance certificate to ensure withholding is not required.
If a clearance certificate is not provided by settlement, the purchaser must remit 12.5% to the ATO. A vendor can apply for a clearance certificate before they list their property on the market to ensure there are no delays at settlement. The ATO have advised a clearance certificate will be valid for 12 months and must be valid at the time the property transaction was entered into to avoid any withholding.
Where a clearance certificate is not issued ie, because the vendor is a non-resident, the rate of withholding can be less than 12.5% if the vendor or purchaser applies to the commissioner for a variation. A variation will be appropriate where:
- The foreign resident will not make a capital gain on the transaction
- The foreign resident will otherwise not be taxable as a result of the transaction ie, they may have sufficient carry forward losses, or
- There are multiple vendors, only one of which is a foreign resident
The variation must be provided to the purchaser at settlement to impact the level of withholding required. The ATO have indicated that a variation in most cases will be provided within 28 days and an on-line application form will be available.
Penalties for non-compliance
The onus of withholding is with the purchaser therefore they take on all risk associated with non-compliance. The penalty for failing to withhold is equal to the amount that was required to be withheld plus interest for late payment. Good luck trying to recover this from a non-resident vendor should you fall foul of the new provisions.
Message going forward
These new provisions are going to impact the whole property market and unless a clearance certificate is obtained a 12.5% withholding will apply to purchases where the value is greater than $750,000. Key points to note:
- Contracts of sale will need to be updated to include the withholding obligation to ensure there aren’t delays at settlement;
- Australian resident vendors should apply for clearance certificates once they decide to put their property on the market.
- Non-resident vendors will need to consider their own affairs and decide whether a variation is required. They will get a credit for the 12.5% withheld but this can only be obtained by lodging an Australian income tax return.
Do you require more information about this withholding tax?
This is a brief snap shot of the new provisions, if you would like further advice, please contact your local RSM office.