Broadly, where a foreign resident disposes of certain taxable n property, the purchaser will be required to withhold 10% of the purchase price and pay that amount to the n Taxation Office (ATO).
The new withholding regime will apply to contracts entered into on or after 1 July 2016.
Who is a foreign resident?
The legislation will use the tax definition of resident, rather than that contained in Immigration legislation.
The definition, for tax purposes, of resident of is contained in subsection 6(1) of the ITAA 1936. A foreign resident is a person other than a resident (subsection 995-1(1) of the ITAA 1997.
This legislation will apply to:
n citizens and permanent visa holders who are treated as foreign residents for n tax purposes;
Temporary residents; and
Foreign nationals who are not treated as tax residents of
What assets are caught?
This withholding is limited to taxable n property with a market value of AUD 2million or more, being:
Real property in – land, buildings, residential and commercial property;
Lease premiums paid for the grant of a lease over real property in ;
Mining, quarrying or prospecting rights;
Interests in n 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.
There are a number of exclusions. If the foreign resident vendor falls within one of these categories, then the 10% withholding is not applicable:
Real property transactions with a market value under AUD million;
Transactions listed on an approved stock exchange; or
The foreign resident vendor is under external administration or in bankruptcy.
For real property transactions with a market value of AUD2 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 can 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 would be required to withhold 10% of the purchase price and pay this to the ATO.
This means n resident vendors of real property with a market value of AUD2 million or above 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.
Obtaining a clearance certificate
The vendor may apply for a clearance certificate at any time they are considering the disposal of real property. This can be before the property is listed for sale.
The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the purchaser prior to settlement.
If the vendor is automatically assessed as an n resident, a clearance certificate will be issued electronically within days of the application being submitted. If there are data irregularities or exceptions, some manual processing may be required and the clearance certificate will be provided within 14–28 days.
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 notice of variation should be provided to the purchaser before settlement to ensure the reduced withholding rate applies.
Paying and reporting withholding amounts
Where a withholding obligation exists, the purchaser must withhold the relevant amount at settlement and pay it to the ATO without delay (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.
Purchaser payment notification
Where an amount is withheld, the purchaser is required to 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 then automatically receive a payment reference number, and a payment slip which includes a barcode for use if paying in person at Post. The purchaser needs to pay the withholding on or before settlement.
What this means for purchasers
Where a foreign resident disposes of n real property with a market value of $2 million or above, the purchaser will be required to withhold 10% of the purchase price and pay it to the ATO unless the seller provides the purchaser with a clearance certificate or a variation certificate.
If the purchaser acquires property from multiple vendors, the obligation to pay an amount may arise if any of the vendors is a relevant foreign resident.
What this means for sellers
n resident vendors who dispose of n real property with a market value of AUD2 million or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.
All transactions involving real property with a market value of AUD2 million or above will need the vendor and purchaser to consider if a clearance certificate is required
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