By Kim Reynolds
As part of the Australian Government’s ongoing fight against tax avoidance, new rules have been introduced from 1 July 2016 relating to foreign resident capital gains tax withholding.
These rules have consequences for both resident and non-resident purchasers and sellers of Australian real property, and may also affect other transactions of “taxable Australian property”.
Taxable Australian property is defined as:
- real property in Australia – land, buildings, residential and commercial property;
- lease premiums paid for the grant of a lease over real property in Australia;
- mining, quarrying or prospecting rights;
- interests in Australian entities whose majority assets consist of the above such property or interests (is shares in a company or units in a trust); or
- options or rights to acquire the above property or interest.
Sales of Australian Real Property
The purchaser of Australian real property, where the property is worth more than $2 million, must withhold 10% of the purchase price unless the vendor produces a clearance certificate or variation certificate. The Government has proposed that the threshold be reduced to $750,000 and the rate of withholding be increased to 12.5% from 1 July 2017.
For Australian resident vendors, a clearance certificate can be obtained from the Australian Taxation Office (ATO) as soon as they consider selling their property, as the certificate lasts for 12 months, and is not property-specific. Where a clearance certificate is produced by the vendor, no tax is required to be withheld.
For non-resident vendors, a variation certificate may be obtained in certain circumstances, which will vary the amount of withholding from 10% of the sale price (12.5% from 1 July 2017), to one that more correctly reflects the actual amount of capital gains tax payable (and can be 0% should the property be sold at a loss). The variation certificate is also valid for 12 months, however unlike the clearance certificate, is property specific.
It is important to note that the withholding tax noted above is a non-final tax. The non-resident vendor will still need to lodge an Australian income tax return, and can claim the amount withheld as a tax credit.
Where the purchaser fails to withhold the correct amount, the ATO can impose penalties equal to the amount that should have been withheld. Accordingly, it is important for all parties to ensure that the correct certificate is applied for prior to a sale.
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