It's all about low voluntary compliance by foreign residents who sell Australian property – and the government is tightening tax laws to shift the compliance burden on certain transactions. It's complex – and it comes into effect on 1 July 2016.
In this article, we aim to address how the requirements of the Tax and Superannuation Laws Amendment (2015 Measure No. 6) Bill 2015 will apply to a standard real property transaction (i.e., the sale of Australian real property (ARP) under a standard contract for sale and purchase of land).
The Amendment deals with a complex area of law and affects other types of property transactions which are not the subject of this article. For example, "indirect" interests in ARP (ie where an interest is held in an entity whose underlying value is principally derived from ARP) and an option to acquire ARP property, whether directly or indirectly.
What is the purpose of the Amendment?
In short, the Amendment requires a purchaser who is buying ARP from a foreign resident vendor, to remit 10% of the purchase price to the Australian Taxation Office (ATO) on account of the foreign vendor's Capital Gains Tax (CGT) liability.
At present, a foreign resident who sells ARP and makes a capital gain on the sale is required to lodge an income tax return with the ATO for assessment of CGT liability. However, voluntary compliance with this obligation by foreign residents is low. The ATO has found it difficult to effectively enforce compliance or penalise those who fail to lodge a return, particularly if the proceeds of sale have been transferred off-shore and the particular foreign resident no longer resides, nor has assets in Australia.
Instead of relying on voluntary self-assessment, the Government will rely on the provisions of the Amendment, which shifts the compliance burden to the parties to an affected transaction.
From 1 July 2016, purchasers will be required to remit part of the sale proceeds for an affected transaction directly to the ATO on account of a foreign resident vendor's potential CGT liability.
What is an 'affected transaction'?
In relation to a standard property transaction, if the following criteria are met, the transaction will be affected:
- the property is ARP;
- the vendor is a foreign resident; and
- the sale price of the property is $2 million or more.
What obligations do the new laws impose on the parties?
Both purchasers and vendors will be affected by the new compliance requirements.
A purchaser will be required to:
- register with the ATO as a withholder;
- remit the withholding amount (being 10% of the first element of the cost base of the sale (usually the purchase price)) directly to the ATO on or before settlement by EFT, BPAY or other such method as approved by the Commissioner; and
- notify the Commissioner (in the approved form) that payment has been made.
The purchaser will be liable for amounts not withheld and must maintain records of amounts withheld or, where the vendor has obtained a clearance certificate, copies of the certificate (see below, under Vendor).
All vendors (whether foreign residents or Australian citizens) will be affected by the Amendment insofar as compliance requirements are concerned.
If a vendor is not a foreign resident, the vendor must obtain a clearance certificate from the ATO which will indicate as such. A purchaser is entitled to rely on the clearance certificate and will not be required to withhold and remit the withholding amount to the ATO.
If a vendor does not obtain a clearance certificate, the vendor will be treated as a foreign resident for the purposes of the Amendment and the purchaser will be obliged to take the withholding steps noted above under "Purchaser".
Variations to withholding amount
If a vendor is a foreign resident or does not obtain a clearance certificate and the withholding steps apply, the vendor or the purchaser can apply to the ATO for a variation to the withholding amount. The variation may reduce the 10% withholding amount partially or completely.
Tax credits for withheld amount
When a purchaser remits the withholding amount to the ATO, the vendor will become entitle to a credit for the withholding amount paid. The entitlement to the credit arises when the ATO makes an income tax assessment (or determines that no tax is payable) with respect to the vendor for the relevant income year. The vendor must then lodge a tax return to claim the credit. The right to a credit does not automatically arise however, simply because an amount was withheld.
In addition to the exemption created when a clearance certificate is issued to a vendor, the following situations impose no withholding obligation:
- where the sale price is less than $2 million;
- a transaction that is conducted through a stock exchange or crossing system;
- an arrangement that is already subject to an existing withholding obligation;
- a securities lending arrangement; or
- transaction involving vendors who are subject to formal insolvency or bankruptcy proceedings.
It is not clear how the impact of the Amendment will directly affect the property market (for example, there may be resistance for foreign vendors to dispose of real estate assets, or sales to foreign purchasers may decline as a result).
For more information, please contact:
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.