A new withholding regime was passed into law in late February 2016. Under the new regime, purchasers of Australian real property, interests in entities that predominantly hold Australian real property or options over these may have an obligation to withhold 10% and pay the amount to the Commissioner.
The new regime will apply to contracts entered into on or after 1 July 2016.
The purpose of these changes is to address the low levels of tax compliance by foreign residents who dispose of real property, and interests in real property.
The obligation to withhold applies to the purchase of an asset that is:
- Taxable Australian real property (TARP), e.g. land in Australia;
- An indirect Australian real property interest, e.g. shares or units in entities whose value is predominantly derived from Australian land; or
- An option or right to acquire the above.
There are a number of exemptions. The more common exemptions will be:
- Transactions involving Australian land which has a market value of less than $2 million
- Where a clearance certificate or declaration is obtained by the seller.
Importantly, in the case of shares in a company or units in a unit trust, there is no $2 million threshold and sellers will need to provide a declaration to the purchaser. Without the declaration the risk of having to pay withholding tax of 10% to the ATO is with the purchaser.
Before applying any exemption we strongly recommend that a purchaser obtain professional advice to ensure that withholding is not required and they are legally protected in that respect.
The ATO will allow vendors to apply for a clearance certificate online and this can be done at any time the vendor is considering a sale and is valid for 12 months.
The ATO website advises that it is implementing an automated process for issuing a clearance certificate involving:
- The vendor (or their agent) completing an online application form;
- The information on the application being automatically checked against information held by the ATO to assess if the vendor should be treated as an Australian tax resident for the purposes of the transaction; and
- The automatic issuance of a clearance certificate which removes the need for the purchaser to withhold the 10% from the sale proceeds.
The ATO has indicated that straightforward cases should take 1 – 14 days. Non-straightforward cases may require 14 – 28 days and high risk and unusual cases could take longer.
If you considering buying or selling property please consult your Hill Rogers adviser to ensure your interests are appropriately protected and your obligations under these new rules are met