New rules will apply to vendors disposing of certain taxable
Australian property under contracts entered into from 1 July 2016.
A 10% withholding tax will be incurred on these transactions at
Australian resident vendors selling real property will need to
obtain a clearance certificate from the ATO prior to settlement to
ensure they do not incur the 10% withholding tax. Purchasers must
pay the amount withheld at settlement to the Commissioner of
This new withholding legislation is to assist in the collection
of foreign residents' Australian tax liabilities.
The legislation imposes an obligation on purchasers to withhold
10% of the purchase price and pay it to the ATO where a vendor
enters a contract after 1 July 2016 and disposes of certain asset
It is important to note that the following asset types are
captured by this legislation:
all real property in Australia;
mining, quarrying or prospecting rights where the material is
situated in Australia;
lease premiums paid for the grant of a lease over real property
interests in Australian entities whose majority of assets
consist of the above asset types. These are called indirect
options or rights to acquire any of the above.
It should be noted that options entered into before 1 July 2016
but exercised after 1 July 2016 will attract the new
There are exclusions, mainly, that the 10% withholding tax will
NOT apply to real property transactions with a
market value of less than $2,000,000.
If the transaction is at arm's length, the purchase price
will be used in determining the market value of the property. If
the transaction is not at arm's length a valuation will usually
Australian resident vendors can avoid the 10% withholding tax by
providing to the purchaser prior to settlement:
a clearance certificate from the ATO (for Australian real
in respect of indirect assets only, a declaration by the vendor
that they are not a foreign resident.
The clearance certificate confirms that the withholding tax is
not applicable to the transaction. Where a valid clearance
certificate is provided, the purchaser is not required to withhold
an amount from the purchase price for the vendor listed in the
clearance certificate. If the vendor fails to provide the clearance
certificate by settlement, the purchaser is required to withhold
10% of the purchase price.
Where a withholding obligation exists, the purchaser must
withhold the relevant amount at settlement and pay it to the ATO (a
general interest charge may apply to late payments). The penalty
for failing to withhold is equal to the amount that was required to
be withheld and paid. An administrative penalty may also be imposed
by the ATO.
Only an Australian resident entity can obtain a clearance
certificate. Solicitors, tax agents or other representatives of the
vendor can apply on the vendor's behalf. However, conveyancers
who are not legal practitioners or registered tax agents cannot
complete the form on behalf of the vendor.
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.
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The Government plans a white paper on tax reform within two years and will then seek a mandate at the next election.
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