A new tax withholding regime and the imposition of stamp duty surcharges in three of Australia’s states are expected to significantly impact foreign resident taxpayers buying or selling Australian property.
These measures follow the Treasurer’s announcement that he will ‘get tough’ on foreign nationals who have purchased residential properties in Australia in breach of foreign investment rules.
Foreign Resident Withholding Regime
Effective from 1 July 2016, the Foreign Resident Withholding Regime has been introduced to make it easier for the Government to recover tax on the capital gains made on the sale of assets by a foreign resident.
The new regime will apply to vendors disposing of certain taxable Australian property under contracts entered into from 1 July 2016. A 10% non-final withholding will be incurred on these transactions at settlement.
From 1 July 2016, all purchasers of certain Australian property may be required to withhold and remit to the ATO 10% of the purchase price where the vendor (or one of the vendors) is considered a foreign resident (subject to certain exemptions).
The following asset types will be captured by new withholding regime:
- Taxable Australian real property with a market value of $2 million or more. These assets include:
- vacant land, buildings, residential and commercial property
- mining, quarrying or prospecting rights where the material is situated in Australia
- lease premiums paid for the grant of a lease over real property in Australia
- other assets
- indirect Australian real property interests in Australian entities whose majority of assets consist of the above asset types
- options or rights to acquire any of the above asset types
A vendor is considered a foreign resident where, in very broad terms, the purchaser knows or even reasonably believes that the vendor is a foreign resident until the purchaser is proven otherwise.
We expect that the new withholding regime will provide additional obligations and complications particularly in relation to the sale of real estate, and could in some situations delay settlement.
There area few exemptions from the new withholding regime. The key exemptions in respect to real estate sales are:
- The real estate has a market value of less than $2 million; and/or
- The vendor obtains a clearance certificate from the ATO.
Accordingly, the purchaser must withhold 10% of the purchase price in transactions involving real estate with a market value of $2 million or more, unless the vendor shows the purchaser a clearance certificate from the ATO.
Clearance certificates are issued by the ATO (upon request) and provide certainty to purchasers regarding their withholding obligations. The clearance certificate confirms that the withholding tax is not applicable to the transaction.
Stamp Duty and Land Tax
Following the Victorian Government’s announcement to impose a stamp duty surcharge on foreign purchasers buying residential property, both New South Wales and Queensland have followed suit.
From 1 July 2016, Victoria will raise its existing 3 per cent stamp duty surcharge and 0.5 per cent land tax surcharge to 7 per cent and 1.5 per cent respectively.
In NSW, foreign buyers will incur a 4 per cent stamp duty surcharge from 21st of June 2016 and 0.75 per cent land tax surcharge starting in 2017.
The Queensland Government has announced, it will increase its current 1.5% stamp duty surcharge for foreign purchasers to 3% from 1 October 2016.
Should you be affected by any of the measure introduced above please contact William Buck for further advice.