The government has introduced a 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property which applies to contracts entered into on or after 1 July 2016.
Where a foreign resident disposes of certain taxable Australian property, the purchaser must withhold 10% of the purchase price and pay that amount to the Australian Taxation Office (ATO). The withholding also applies where the disposal of taxable Australian property by a foreign resident generates gains and, as a result, is taxable as ordinary income, rather than as a capital gain.
This withholding is limited to taxable Australian property, being:
- 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 – this is called an indirect interest;
- Options or rights to acquire the above property or interest.
- Real property transactions with a market value under $2 million, so the vast majority of residential house sales will be unaffected by this measure.
- Transactions listed on an approved stock exchange;
- Assets where the foreign resident vendor is under external administration or in bankruptcy.
The ATO can provide a clearance certificate which confirms that the withholding tax is not to be withheld from the transaction. For real property transactions with a market value of $2 million or above, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO. This certificate is to be provided to the purchaser on or before the settlement of the transaction. Where a clearance certificate is provided, the purchaser is not required to withhold an amount from the purchase price.
If the vendor fails to provide the certificate by settlement, the purchaser must withhold 10% of the purchase price and pay this to the ATO. This means Australian resident vendors of real property with a market value of $2 million or more will need to apply for a clearance certificate and provide this to the purchaser before settlement to ensure no funds are withheld from the sale proceeds.
A vendor may apply for a clearance certificate at any time they are considering the disposal of real property, even before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid when given to the purchaser prior to settlement.
The ATO provides an automated process for issuing a clearance certificate. The vendor (or their agent) completes an online ‘Clearance certificate application for Australian residents’ form. The application information is automatically checked against information held by the ATO to assess if the vendor should be treated as an Australian tax resident for the purposes of the transaction and, if so, a clearance certificate is automatically issued, removing the need for the purchaser to withhold the 10% from the sale proceeds.
The ATO says it will issue clearance certificates within days of an application being made but where there are data irregularities or exceptions, clearance certificates will be provided within 14 – 28 days. Higher risk and unusual cases could take longer.
Where the vendor is not entitled to a clearance certificate, but believes a withholding of 10% is inappropriate, the vendor can apply for a variation. The vendor completes an on-line ‘Variation application for foreign residents and other parties’ form requesting a lesser withholding rate be determined by the ATO. In the majority of cases (where the ATO has all the required information), the variation will be provided within 28 days. The notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.
Where a withholding obligation exists, the purchaser must withhold the relevant amount at settlement and pay it to the ATO without delay (the general interest charge may apply to late payments). The penalty for failing to withhold is equal to the amount that was required to be withheld and paid. An administrative penalty may also be imposed.
Where an amount is withheld, the purchaser must complete an online ‘Purchaser Payment Notification’ form to provide details of the vendor, purchaser and the asset being acquired to the ATO. The purchaser will automatically receive a payment reference number and a payment slip which includes a barcode for use if paying in person at Australia Post. The purchaser needs to pay the withholding on or before settlement.