Substantial changes have been made to direct property settlements for Australian real estate worth $2 million or more. These changes are designed to ensure that foreign residents are unable to avoid the Australian capital gains tax regime, as compliance and tax collection in this area has historically been poor.
Unfortunately, the legislation places an onus on all sellers to obtain certification from the Australian Taxation Office (ATO) if they want to claim their entitlement to a reduction or exemption from the measures. All purchasers have an obligation to assess and remit the appropriate withholding, not simply where a non-resident is involved. The legislation applies to contracts entered into on or after 1 July 2016, where a direct interest in real property with a market value of $2 million or more is transferred.
To be eligible for a clearance certificate the vendor must either be an Australian resident for tax purposes or must have no capital gains tax liability in respect of the sale.
To be eligible for a variation certificate the vendor must have less than the 10% withholding value as their capital gains tax liability in respect of the sale, and must provide a calculation to reduce the rate of withholding applicable.
It is important to note that the responsibility to remit falls on the purchaser. If the purchaser fails or is unable to withhold at the time of settlement they will still be liable for the 10% withholding – that is they could end up paying 110% of the purchase price!
The legislation may also apply to property transfers where no consideration is involved, such as executors or trustees transferring properties to beneficiaries, and property transfers upon breakdown of marriage.
Note that the exemption for direct property transactions with a market value of under $2 million does not apply to indirect interests being transferred, that is, there is no threshold.
Indirect interests covered by the legislation may include:
Care needs to be exercised when dealing with indirect interests as slightly different obligations apply.
These new changes once again highlight the importance of including trusted advisors in your purchasing arrangements.
An Important Message
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