A new withholding regime was passed into law in late February 2016. Under this 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 percent of the gross sales proceeds and pay the amount to the Commissioner.
The new regime applies to contracts entered into on or after July 1, 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 taxable Australian property that is:
- Real property, e.g., land and buildings in Australia;
- An indirect Australian real property interest, e.g., shares or units in entities whose value is predominantly derived from Australian land and buildings;
- Lease premiums paid for the grant of a lease over real property;
- An option or right to acquire the above property or interest.
There are a number of exemptions. The more common exemptions are:
- Transactions involving Australian land which has a market value of less than AUD2m;
- 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 AUD2m 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 percent to the Australian Taxation Office (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 clearance certificate must be valid at the time the certificate is given to the purchaser prior to settlement. The ATO has implemented 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;
- The automatic issuance of a clearance certificate which removes the obligation for the purchaser to withhold the 10 percent 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.
New Stamp Duty Surcharges
Various states around Australia have recently introduced stamp duty surcharges on the purchase of property by foreign persons. Stamp duty is a state based tax and therefore each state will have slightly different regimes. In this article we focus on the two largest state economies of New South Wales (NSW) and Victoria (VIC).
NSW has introduced a 4 percent surcharge on the purchase of residential real estate by foreign persons from June 21, 2016. The surcharge is in addition to the duty payable on the purchase of residential property. Foreign persons will also cease being eligible for the 12 month deferral of the payment of stamp duty for purchases of off-the-plan residential property.
Buyers should note that purchasing an indirect interest in NSW residential property may also be caught. For example, if a foreign person buys a company that holds residential land, then the surcharge can also apply. The definition of foreign person does not include an Australian Citizen, irrespective of where they reside.
As an example, if a foreign person purchases a residential property in NSW for AUD2m, the total duty payable is AUD175,490 calculated as follows:
- Duty payable on AUD2m is AUD95,490;
- Surcharge of 4 percent on AUD2m is AUD80,000.
VIC has introduced a 7 percent surcharge for acquisitions of residential property by foreign purchasers from July 1, 2016. (A foreign purchaser of residential property can include a foreign natural person, a foreign company, and/or a foreign trust.)
This surcharge means foreign purchasers who sign a contract on or after July 1, 2016 to purchase residential property in VIC will pay duty of 12.5 percent1 of the dutiable value of the property (for property exceeding AUD960,000).
New Land Tax Surcharges
The state governments of NSW and VIC also levy an annual land tax on the owners of real property situated within the respective state.
Unless exempted, an owner of land as at December 31 each year will be required to pay land tax to the state government. In NSW, a tax-free threshold of AUD482,000 (2016 tax year) applies, and the rate of land tax is 1.6 percent. The rate increases to 2 percent for land values over UD2,947m.
It should be noted that land tax is applied on the unimproved value of land, not market value of land.
From the 2017 land tax year, a 0.75 percent land tax surcharge applies to the taxable value of residential land owned by a foreign person. There is no threshold for the surcharge. This means that an owner of land in NSW on December 31, 2016 that is a foreign person will be required to pay the surcharge in addition to the standard rate of land tax.
An annual land tax surcharge of 1.5 percent (currently at 0.5 percent) will apply to land in VIC from January 1, 2017 that is owned by an absentee owner (an absentee owner can be a natural person, company or trust).
From the 2017 land tax year (based on land owned on December 31, 2016), the top rate of land tax (including this additional surcharge) for absentee owners will be up to 3.75 percent (this is applicable to taxable land values of AUD3m and above).
1 An existing stamp duty rate of 5.5 percent is currently imposed on residential property purchases
To find out more contact the Hill Rogers taxation team here.