NEW foreign resident capital
gains withholding payments
Be prepared: The following applies to all
contracts entered into which will settle from 1 July 2016
The
Government’s new “non-final withholding tax” will mean that where a foreign
resident disposes of Australian property the Buyer will need to withhold
and remit 10% of the market value of the property to the ATO.
What
does it apply to?
The
new withholding tax will apply to all transactions for Australian property
where the vendor is a foreign person, including options and rights to acquire,
except assignments of leases where no premium is paid for entry into the lease.
What
is ‘market value’?
Where
parties contract at arm’s length, the purchase price is taken as the market
value.
Importantly,
there is an exception where the market value is below $2million, leaving
the vast majority of residential property sales unaffected. REIQ and QLS are
likely to release a new edition of the standard contract shortly.
It
is the purchaser’s responsibility to remit payment to the ATO from the purchase
price. Foreign sellers unaware of this might expect to receive more funds from
their sale than they will. Issues could arise where the funds from a sale are
intended to be used towards a subsequent purchase, and the funds are short as a
result of the withholding.
What
is a clearance certificate?
For
sales over $2million, a clearance certificate can be obtained by the seller
which provides the certainty for both parties that the purchase price does not
include the withholding tax. Using the certificate means no nasty surprises for
the seller in that no funds are withheld from the sale proceeds. These certificates
can be obtained before listing the property for sale.
The
clearance certificate application will be an online process. The ATO will be
making it available before 30 June. After the application is lodged, the tax
office are predicting it will take days for the certificate to be issued,
unless there are irregularities within the system whereby certificates could
take up to 4 weeks.
What
is the effect of GST?
If
the transaction is subject to GST, the withholding will be 10% of the
GST-inclusive purchase price less the input credit deduction. This only applies
where the purchaser is registered for GST or entitled to an input tax credit.
