NEW foreign resident capital gains withholding payments

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.

The tax office has published a range of FAQ’s on the new laws which can be accessed here.

Solar rebates and residential tenancies

The solar rebate scheme entitled a person to 44 cents per kilowatt hour of electricity they fed back into the system via their solar panels. No new applications have been accepted since 2012; however those who signed up before the cut-off date will benefit from the scheme until 2028. To remain entitled, the name on the electricity account needs to stay the same. This can cause issues with leased properties where a tenant moves in and decides to change the account name to their own or switch electricity providers.

Who gets the rebate?

The tariff rebate is paid to the customer that holds the electricity account for the individual premises.

There is nothing preventing a rental property from receiving the feed-in tariff.

However, if the name on the electricity account at the property changes, for example due to a change in tenant, then eligibility for the scheme would cease.

What happens if the tenant gets their own electricity hooked up?

The name on the account changes from the landlord to the tenant, therefore the entitlement to the 44c/kWh rebate ceases.  If this happens on the agent’s watch, a landlord may be very unhappy.  In theory this should not be able to be done as a switch of electricity accounts should require authority from new and outgoing account holders.  We are aware however that this has actually happened without the consent or knowledge of the landlord.  Clarity and confirmation in writing will help protect an agent.

How does the landlord get a return on their investment?

The landlord could increase the rent and say to the tenant ‘you'll be getting free electricity’.

In the event a bloody-minded or ignorant tenant hooks up their own electricity despite the landlord's specific instruction not to, and the landlord subsequently loses their entitlement, provided there is appropriate documentation to create and prove the tenant had this obligation,  the landlord may be able to sue for the loss of the feed-in tariff from the date the tenant switched the account name to 1 July 2028, being the date the legislation is due to expire.  

Registered or unregistered leases. What’s the difference?

 

Registered or unregistered leases

What’s the difference?

Most people are surprised when they learn that commercial leases may not need to be registered. Nonetheless, it is quite common for even a savvy party to neglect or decide not to register a lease to minimise costs.

Whether a lease must be registered depends on the term of the lease.

Under the Land Title Act a lease for a term of 3 years or less (granted after 24 April 1994) need not be registered, as the rights of a lessee under such an unregistered lease will be protected by the Land Title Act.[1]

A lease for an initial term of 3 years or less doesn’t need to be registered to create a valid lease. However, the option period (if exercised) will not bind anyone else with a registered interest in the property such as a new owner, a bank with a mortgage over the property, or a new lessee.

A lease for a term of more than 3 years must be registered on the title, although it will remain valid without registration.[2] If the lease is not registered, it will be defeated by the interest of a subsequent registered proprietor.  That is, if the building is sold and the lease is not registered, the new registered owner doesn’t have to honour any option to extend the tenancy.

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[1] Land Title Act s 185(1)(b)

[2] Land Title Act s 71