New 10% withholding tax regime to apply to Australian real estate transactions from 1 July 2016

The Tax and Superannuation Laws Amendment (2015 Measures No.6) Bill 2015 received Royal Assent on 25 February 2016. Applying from 1 July 2016, the legislation introduces a new foreign CGT withholding tax regime which will assist the Australian Taxation Office (ATO) in the collection of foreign residents’ Australian tax liabilities arising from the sale of property.

Under the new rules, a 10% non-final withholding tax applies to the disposal of certain taxable Australian property by foreign residents, with the purchaser liable to withhold and pay the amount to the ATO on or before the day of settlement. If the purchaser fails to pay the withholding tax, they will incur general interest charges on unpaid amounts.

Importantly, Australian resident vendors that are selling real property with a market value of more than $2 million will need to obtain a clearance certificate from the ATO prior to settlement to ensure they don’t have 10% of their proceeds withheld. Real property can include rights and options over property, along with indirect property interests such as the sale of more than 10% of the shares in a company that holds significant land.  

The following are some of the assets that will not be subject to the withholding rules:

  • Taxable Australian real property with a market value of less than $2 million
  • Transactions undertaken on an approved stock exchange
  • Transactions subject to another withholding obligation
  • Securities lending arrangements
  • Transactions where the vendor is in administration or transactions arising from the administration of a bankrupt estate, a debt agreement or a personal insolvency agreement.

What you need to do

  • Buyers and sellers of Australian taxable property will need to consider the practical operation of the new regime and incorporate the new arrangements into their transactions
  • Real estate agents and lawyers will need to inform their clients of the new rules and may also need to update sales documentation
  • Australian resident vendors, although not affected by the new rules, will still need to obtain a clearance certificate from the ATO and provide it to the purchaser prior to settlement.

The ATO is implementing an ‘automated process’, with an online form to be available on their website from late June 2016.  Clearance Certificates will be valid for 12 months and should be issued within a few days of the application being submitted if there are no data irregularities or exceptions. For those wanting to get in early, the ATO has made available a PDF form for manual completion and lodgement. For businesses that regularly sell property over the $2 million threshold, the application for the annual Clearance Certificate should become part of the year end planning process going forward.