Withholding Tax on Real Estate
The Federal Government has introduced legislation that will significantly affect vendors of property valued at $750,000 or more.
The aim of the legislation is to prevent foreign residents from avoiding Australian capital gains tax. When a foreign resident disposes of taxable Australian property the purchaser will be required to withhold 12.5% of the purchase price and pay that to the Australian Taxation Office (ATO). The withholding tax applies to the sale of all real estate in Australia, including residential, commercial, industrial and rural real estate. It also applies to the sale of interests in land rich entities. The regime does not apply to sales with a market value under $750,000.
As with most tax matters, the process is a complicated one. Initially all vendors are assumed to be foreign residents. To avoid the obligation imposed on the purchaser to pay the 12.5% withholding tax to the ATO the vendor has to produce to the purchaser a “clearance certificate”. These clearance certificates will be issued by the ATO and will confirm that no withholding tax is payable where the vendor is not a foreign resident.
The new regime applies to all contracts entered into on or after 1 July 2016. This means that for all contracts after that date where the price is more than $750,000 the purchaser must withhold 12.5% of the purchase price at settlement and remit it to the ATO, unless the vendor provides a clearance certificate. A vendor selling a property with an expected sale price of more than $750,000 should apply for a clearance certificate as soon as possible to avoid delays. The ATO say they expect clearance certificates will be issued in most cases within a few days of the application, however some might take much longer. Clearance certificates can be applied for before the property is sold, but they will only be valid for 12 months. If a clearance certificate is issued but there is a delay in selling the property, a fresh clearance certified will need to be obtained.
If a purchaser does not comply with the withholding tax obligations, a penalty will be imposed on that purchaser equal to the amount that was required to be withheld and paid. This presents very particular risks for purchasers who must be vigilant to ensure strict compliance with these new requirements.
Author: Paul Stephens