Most Read Contributor in Australia, September 2016
In October last year the Commonwealth Government issued a
discussion paper with regard to its proposed 10% withholding tax on
the sale of taxable Australian property by foreign residents. The
proposal is intended to assist the Government to control or limit
the "leakage" of tax payments due by foreign residents on
the sale of Australian property/assets. The scheme was introduced
by the former Government and the current Government has indicated
its intention to proceed with the scheme.
Under the scheme an obligation will be placed on the purchaser
of "taxable Australian property" owned by foreign
residents to withhold 10% of the purchase price and remit it to the
Australian Tax Office as a "non-final" withholding of tax
on account of the Australian tax liabilities of the foreign
If implemented, it is intended that the new arrangements will
come into effect on 1 July 2016.
As currently proposed, the arrangement would apply to a very
wide range of property and assets including mining rights,
commercial real estate and residential property priced at $2.5
million or more, as well as assets used to carry on business
through a permanent establishment in Australia.
Certain Indirect real estate acquisitions will also be covered,
such as the acquisition of shares or units in companies or trusts
owning real estate.
The arrangements would impose obligations on purchasers which
could potentially be quite onerous, and significantly change
commercial and legal practices in relation to the sale of real
estate and other assets.
It is envisaged that the purchaser will have an obligation to
establish, based on information "reasonably available" to
them, whether the seller is a foreign resident and whether the
property being sold is "taxable Australian property". It
is not yet clear what the extent of this obligation will be, but it
seems unlikely that it will be sufficient for a purchaser to rely
on declarations or warranties given by the seller in the relevant
contract documents. Penalties may apply to a purchaser who does not
make sufficient enquiries. If these proposals become law,
purchasers and their advisors will have to implement systems to
ensure that adequate enquiries are made before settlement, to
determine whether funds are to be withheld at settlement and
remitted to the ATO;
In the case of indirect acquisitions (ie the purchase of shares
or units in entities that own "taxable Australian
property") it may be necessary for a purchaser to establish
more information about the entity and its assets, including the
value of its assets, and also the nature and extent of interests
held by foreign residents, and their associates;
Purchasers and their lawyers or conveyancers will have an
obligation to collect the funds at settlement and then remit them
to the ATO, presumably quoting the relevant tax file number or
other details. This will also create more work and cost for a
It is not clear what rights a seller may have to prevent the
withholding, for example where there is or will be no tax liability
due to existing tax losses that will wholly or partially off-set
the proposed 10% withholding amount;
It is also not yet clear how these laws will apply in
transactions involving instalment payments. For example, whether an
amount is to be withheld from each instalment or only the
In many commercial transactions it is often the case that
secured debt is greater than 90% of sale proceeds and indeed often
a secured creditor will take 100% of the proceeds. In these cases
it is suggested that the ATO would have "discretion" not
to require the full withholding amount. This needs to be clarified.
It may raise complicated issues about whether withholding amounts
not retained on some cross collateralised assets can be accumulated
for retention on the sale of other assets by the same seller or
There are also often situations where unsecured creditors are
paid out of the proceeds of asset sales. The proposed withholding
obligations in favour of the ATO would appear to give the ATO
priority as against other unsecured creditors.
The Government recently sought submissions on the discussion
paper and it is expected that a further discussion paper will be
issued in the first half of this year.
This publication does not deal with every important topic or
change in law and is not intended to be relied upon as a substitute
for legal or other advice that may be relevant to the reader's
specific circumstances. If you have found this publication of
interest and would like to know more or wish to obtain legal advice
relevant to your circumstances please contact one of the named
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Exemptions or concessions on stamp duty could apply when contemplating the purchase or transfer of NSW real estate.
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