Australia: Government proposal to withhold tax on sale of property by foreign residents

Last Updated: 13 February 2015
Article by Steve Aitchison

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 resident.

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.

For example:

  • 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 purchaser;
  • 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 last;
  • 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 group;
  • 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 individuals listed.

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