Pub­li­ca­tions

Gov­ern­ment and ATO tight­en laws in rela­tion to sale of prop­er­ty by for­eign residents 

IN BRIEF

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, Daniel Ken­twell addressess how the how the require­ments of the Tax and Super­an­nu­a­tion Laws Amend­ment (2015 Meausre 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:

  1. the prop­er­ty is ARP;
  2. the ven­dor is a for­eign res­i­dent; and
  3. 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.

Pur­chas­er

A pur­chas­er will be required to:

(a) reg­is­ter with the ATO as a with­hold­er;

(b) 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

(c) 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).

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.

Exemp­tions

In addi­tion to the exemp­tion cre­at­ed when a clear­ance cer­tifi­cate is issued to a ven­dor, the fol­low­ing sit­u­a­tions impose no with­hold­ing obligation:

(a) where the sale price is less than $2 million;

(b) a trans­ac­tion that is con­duct­ed through a stock exchange or cross­ing system;

(c) an arrange­ment that is already sub­ject to an exist­ing with­hold­ing obligation;

(d) a secu­ri­ties lend­ing arrange­ment; or

(e) 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).

Pur­chasers par­tic­u­lar­ly need to ensure their solic­i­tors or con­veyancers are famil­iar with the require­ments of the Amend­ment so they do not find them­selves liable for amounts not withheld.