In a move that coincides with the Victorian government’s moves to increase the stamp duty surcharge on foreign buyers, the Federal government’s new foreign resident capital gains withholding tax (WHT) aims to strike on foreign vendors and tighten tax compliance.
From July 1, 2016, purchasers will be required to withhold 10% of the purchase price to remit to the Australian Taxation Office (ATO) where the vendor is a foreign resident. The WHT can apply to sales contracts and option agreements over Australian real estate entered into on or after the 1st July 2016.
What is affected and what is exempt?
In an article provided by McCullough Robertson Lawyers, “WHT will apply to:
- Taxable Australian real property (TARP), i.e. Australian land (including lease of land), mining quarrying or prospecting rights;
- An indirect Australian interest;
- An option or right to acquire the property in the bullet points above
Transactions excluded are:
- Transaction involving TARP or a company title interest in property which is less than $2 million (note that option agreements do not fall within this exclusion);
- A transaction on an approved stock exchange or conducted using a crossing system (i.e. listed shares and units);
- An arrangement which is already subject to an existing withholding tax;
- Securities lending arrangements; and
- Transactions involving vendors who are subject to formal insolvency or bankruptcy proceedings- whether in Australia or overseas”
What does this mean for buyers of Australian real estate?
Where a purchaser enters into a contract of sale with a market value of $2 million or more, they must withhold 10% of the proceeds unless they are provided with an ATO clearance certificate by the vendor confirming their status as an Australian resident. All vendors are required to provide a clearance certificate to the purchaser prior to settlement to avoid 10% of the purchase price being withheld. Failure to provide the purchaser with the clearance certificate will automatically deem a vendor to be a foreign resident and the 10% will need to be withheld and paid to the ATO.
The responsibility of paying the WHT will rest solely in the hands of purchasers. “A purchaser who fails to withhold must pay an administrative penalty equal to the amount of WHT they should have remitted to the ATO. Additionally, a general interest charge is payable from the date of settlement until the date when the WHT is paid” (McCullough Robertson Lawyers, 2016)
What does this mean for sellers of Australian real estate?
All vendors, whether Australian or foreign, will be required to provide to the purchaser a clearance certificate to avoid the WHT. The ATO have confirmed that the certificates will be valid for a period of twelve months, however vendors are advised to obtain a certificate early in the sales process.
Where WHT is paid to the ATO, vendors are able to claim back the WHT as a tax credit in their tax return.
Read the article ‘The new foreign resident CGT withholding tax….a cheat sheet’, by McCullough Robertson Lawyers here: http://www.mccullough.com.au/publications/f/View/235644/
Thank you to McCullough Robertson Lawyers for their valuable input and assistance