The Commonwealth Government have introduced new legislation that received Royal Assent on 25 February 2016 which provides that where a foreign resident disposes of property for over 2 million dollars, 10% of the purchase price is required to be withheld by the purchaser and paid directly to the Australian Taxation Office (ATO). Through a certificate clearance model, the onus will now fall on the purchaser to withhold this taxable amount and where they fail to do so, they will be liable to the ATO for a minimum amount of $200,000 in respect of residential property. This onus now forces purchasers to undertake a much higher degree of due diligence and ensure those that act on their behalf are not only competent but resourceful. This new withholding regime will apply to contracts entered into on or after 1 July 2016.

WHAT PROPERTY IS AFFECTED?

Where a foreign resident disposes of a taxable Australia property, the purchaser of that property will be required to withhold 10% of the purchase price and pay this amount to the ATO. A taxable Australia property is one of the following:

1. Real property in Australia- land, buildings, residential and commercial buildings;
2. Lease premiums paid for the grant of a lease over real property in Australia;
3. Mining, quarrying and prospecting rights;
4. Interests in Australian entities whose majority assets consist of the above types of property or interest (this is called an indirect interest); and
5. Options or rights to acquire the above types of property or interest.

There are a number of exclusions, however, including:

a. Where the real property is valued under $2 million;
b. Transactions on the approved stock exchange; and
c. If the foreign resident vendor is under external administration or in bankruptcy.

ENSURING ACCOUNTABILITY

In order to ensure that all parties comply with their obligations, this legislation has introduced a clearance certificate model. If a property’s purchase price is more than $2 million, vendors will now be required to apply for and obtain from the Commonwealth Government a clearance certificate. This certificate will state (if provided) that the withholding tax is not required to be withheld by the purchaser and will usually be provided within 1 – 14 days post application. The certificate must then be provided to the purchaser before or at settlement. If the clearance certificate is not produced, the purchaser must assume that 10% of the purchase price must be withheld and paid to the ATO at settlement. If the purchaser is not presented with the certificate and they fail to withhold the 10%, the purchaser will be imposed with a penalty to the amount that was supposed to be withheld.

EXAMPLE 1
Adam has entered into a contract with Leah for the purchase of Leah’s property for $3.5 million. Leah is a foreign person and is aware of the 10% tax required to be withheld by Adam. When Leah and Adam attend settlement, Leah does not present Adam with the clearance certificate and expects Adam to withhold the 10% tax, but Adam is unaware of the law and pays Leah the full amount. Leah takes advantage Adams naivety and obtains the full amount of the purchase price and returns to her home in Germany. The ATO has now issued Adam with a $350,000 penalty being the 10% tax he was supposed to withhold from Leah.

EXAMPLE 2
Greg is a foreign person and is selling his house to Irene for $2.8 million. When the pair attend settlement, Greg has failed to produce the clearance certificate. Irene informs Greg she must withhold 10% for payment to the ATO. Greg says that if she does that the sale is off. Irene, not wanting to lose the property and feeling pressured by Greg, pays the full amount to Greg in the hope no one will find out. Shortly after Greg has returned home to Italy, the ATO hands down a penalty of $280,000 to Irene for failing to comply with her obligations.

APPLICATIONS FOR VARIATION

If the foreign person (Vendor) is not eligible for a clearance certificate, yet believes that the 10% withholding tax is unreasonable, they may apply to the Commissioner of Taxation for a variation. A variation application will usually be assessed and provided within 28 days of receipt.

PROTECTING YOURSELF

The level of due diligence required of purchasers has substantially raised following this new legislation. In order to protect yourself against substantial penalties, it is fundamental that you conduct all the relevant searches into the property and when unable, engage the services of a diligent lawyer or conveyancer.

If you have any queries regarding any of the above, please contact Anthony Pointon or Laszlo Konya.

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