A new law requiring foreign residents to pay tax when they sell certain taxable Australian property is due to take effect on contracts entered into from 1 July 2016.
The legislation, passed on 25 February 2016, will require the purchaser of the property to withhold 10% of the purchase price and pay that amount to the Australian Taxation Office (ATO).
A clearance certificate system is being introduced so that purchasers will be clear on their withholding obligations. For real property transactions with a market value of $2 million or above, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO.
The vendor may apply for a clearance certificate at any time they are considering the disposal of real property. The certificate will be valid for 12 months and must be valid at the time the transaction is entered into.
This is limited to taxable Australian property such as:
- Real property in Australia – land, buildings, residential and commercial property
- Lease premiums paid for the grant of a lease over real property in Australia
- Mining, quarrying or prospecting rights
- Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest
- Options or rights to acquire the above property or interest.
If the foreign resident vendor falls within one of these categories, then the 10% withholding is not applicable:
- Real property transactions with a market value* under $2 million, which will mean that the vast majority of residential house sales will be unaffected by this measure
- Transactions listed on an approved stock exchange
- The foreign resident vendor is under external administration or in bankruptcy.
Where a withholding obligation exists, the purchaser must withhold the relevant amount at settlement and pay it to the ATO without delay. The penalty for failing to withhold is equal to the amount that was required to be withheld and paid.
Should this new law affect you, please contact your local Accru adviser for advice.