If you are a vendor or purchaser of an Australian property with a market value of $750,000 or more, the Government’s recent reforms to improve housing affordability may directly affect you.
The Government announced, as part of the 2017-18 Budget, that purchasers of certain taxable Australian properties from foreign resident vendors will be required to withhold 12.5 per cent of, generally, the purchase price and pay it to the ATO.
Vendors who are not foreign residents will be deemed to be a foreign resident unless a valid clearance certificate has been obtained from the ATO and has been given to the purchaser prior to settlement.
This withholding obligation now applies to all contracts entered into on or after 1 July 2017 for the acquisition of Australian property that has a market value of $750,000 or more.
The original foreign resident capital gains tax (CGT) regime came into effect on 1 July 2016 to assist in the collection of CGT liabilities from foreign residents or those deemed to be foreign residents. It required that purchasers of property with a market value of $2 million or more withhold 10 per cent of the purchase price from the foreign resident vendor.
Current taxation law now requires a purchaser to pay 12.5 per cent of the purchase price to the ATO if a foreign resident capital gains withholding payments obligation arises.
The obligation will arise in relation to a capital gains tax asset if the market value of the asset is $750,000 or more and the asset is a “taxable Australian real property or the holding of an indirect taxable Australian real property interest causes a company title interest to arise”.
This change to the foreign resident capital gains tax is part of the Government’s range of reforms to improve housing affordability and crack down on tax avoidance.
MP Michael Sukkar stated that “by clamping down on tax avoidance by foreign investors in real estate, the government is ensuing home ownership is more achievable for ordinary Australians, and that they have access to secure and affordable housing”.
To further implement the Government’s reforms to improve housing affordability, foreign and temporary residents are also now denied access to the CGT main residence exemption.
However, if you held the property prior to 7:30pm (AEST) 9 May 2017 you will be able to access the main residence exemption until 30 June 2019.
These changes to the withholding obligation will impact both the purchaser and vendor of the property.
If you are the purchaser, you will need to ensure that the contract of sale gives you a contractual right to withhold the money from the vendor at settlement. Even though the withholding obligation is a statutory requirement, you may be in breach of the contract of sale if there is no such clause.
If you are a foreign resident vendor or deemed to be a foreign resident vendor the impact of the withholding obligation may create cash flow issues if not managed properly.
 Taxation Administration Act 1953 (Cth) sch 1 cl 14-215.
 MP Michael Sukkar, ‘Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 Second Reading’ (Speech delivered at the House of Representatives, 1 June 2017).