Withholding tax requirements for purchasers of certain property in Australia commenced on 1 July 2016.
The aim of the requirements is to capture unpaid tax from foreign residents who sell taxable Australian real property. A purchaser of Australian real property that is valued at $2 million will be required to withhold 10% from the purchase price at settlement and remit that money to the Australian Taxation Office (“ATO”). The withholding tax requirements also apply to some indirect interests in Australian real property including leases, mining and quarrying rights and options to acquire interest in such property. Exceptions to the regime are where the market value of the property is under $2 million.
The withholding obligations start with the premise that all sellers of property over $2 million in value are foreign resident’s. A vendor is not treated as a foreign resident if they obtain a valid clearance certificate from the ATO. The vendor may apply for a clearance certificate at any time they are considering selling property. However, it is important to note that the clearance certificate is only valid for 12 months.
When a vendor is not entitled to a clearance certificate, the vendor can apply to the ATO for a variation of the amount required to be withheld. For example, if the vendor will not have a capital gains tax liability as a result of the sale because the land is being sold at a loss.
Of enormous important is the calculation of the market value of the Australian real property. Where the purchase price for the property has been negotiated between the vendor and the purchaser, acting at arm’s length as part of a competitive bargaining process, the ATO will accept the purchase price as the market value. However, there are circumstances where the market value is different to the stated purchaser price. In such cases, the purchaser price will not be the proxy for the market value and the purchaser will need to seek a separate expert valuation.
It also important to understand whether the 10% withholding tax is to be 10% of the purchase price or whether GST and/or adjustments affect the withholding amount. The market value is the purchase price before adjustments. If the purchaser is registered for GST and the supply of the asset is a taxable supply, the market value of the property is reduced by any input tax credit the purchaser is entitled to. If the purchaser is not registered for GST or the supply of the asset is not a taxable supply, the GST inclusive purchase price is the proxy for the market value.
A purchaser that fails to withhold an amount required to be withheld from the purchase price must pay the ATO a penalty equal to the amount that should have been withheld.
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The information on this website is of a general nature only. It is not, nor is it intended to be, legal advice. You should consult a lawyer for individual advice about your particular circumstances.
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