The Australian Government has passed new laws which took effect from 1 July 2016 and impose a 10% withholding tax obligation on payments made in respect of certain real property transactions in Australia (including other interests in real property such as mining rights or an option to buy real property)
These rules are very broad in their application and impose an obligation on the purchaser to pay to the ATO 10% of the purchase price if the property is valued at $2m or more and the vendor (or any of the vendors if more than one) is a foreign resident. The new law will also apply if land is held in a private company or trust and shares or units in the entity are sold.
The ATO payment is not required where the vendor obtains a clearance certificate from the ATO, or is able to make a declaration that they are a resident of Australia in the case of an indirect interest or an option.
It is important for both vendors and purchasers of affected real property in Australia to be aware of these requirements, and to speak to their accountant when considering any purchase or sale of real property.
Are there any excluded assets?
There are a number of exclusions to the withholding tax regime, though of most practical relevance will be:
- Direct real property with a market value of less than $2 million;
- On-market transactions conducted on an approved stock exchange;
- Transactions subject to another tax withholding obligation.
Clearance certificates & vendor declarations
Where the transaction is in respect of Taxable Australian Real Property (essentially a direct property interest), the vendor is automatically treated as a foreign resident for the purposes of these rules unless they provide the purchaser with a valid clearance certificate obtained from the ATO.
A clearance certificate is provided by the ATO and effectively certifies that the vendor is an Australian resident for tax purposes. It relives the purchaser from any obligation to withhold tax and make a payment to the ATO provided it is valid and given to the purchaser at or before settlement.
Clearance certificates can be obtained by vendors from the ATO online and are valid for 12 months. The application form can be found here https://www.ato.gov.au/FRWT_Certificate.aspx
For other indirect Australian real property interests, and options to acquire real property interests, whether the purchaser has a withholding obligation will depend on whether the purchaser has reasonable grounds to believe the vendor is a foreign resident (“the knowledge condition”), or has received one of two possible declarations the vendor is able to provide (and does not know to be false).
When do the new withholding rules apply from?
The rules apply to contracts entered into on or after 1 July 2016.
How do I report and pay to the ATO?
A purchaser who has an obligation to withhold and pay an amount to the ATO under these rules can do so online. The online form can be found here.
If an obligation to withhold exists it must be identified, withheld at settlement and paid to the ATO without delay. If a purchaser has an obligation to withhold and fails to do so, the ATO may apply a penalty equal to the amount that was required to be withheld, in addition to an administrative penalty. In this circumstance the purchaser may have some difficulty recovering the amount from the vendor.
What if I need further information?
If you are buying or selling a property and believe you may be affected by these new rules, please contact Aaron Fitchett email@example.com on 03 9851 9000 or get in touch with your usual contact at Baumgartners.
If you would like to read further information on these rules, a detailed ATO guide is available here.
Aaron is the tax partner at Baumgartners. He is a Chartered Tax Adviser with 18 years’ experience advising private and corporate clients on a wide range of tax and commercial matters. Aaron also represents clients in disputes with the Australian Tax Office and state revenue authorities. Aaron holds a Master of Taxation from UNSW and is an active member of the Taxation Institute of Australia.