Non-Resident Withholding Tax Regime on Taxable Australian Property

From 1 July 2016, the disposal of certain Australian property (including real estate) by non-resident Vendors will be subject to a non-final 10% withholding tax. The purpose of this is to assist in the early collection of tax from foreign residents and encourage them to meet their tax obligations in Australia. The tax is required to be withheld by the Purchaser and remitted to the Australian Tax Office (ATO) by the Purchaser.

Whilst the new regime is aimed at non-residents, it is affecting all property vendors (including Australian resident taxpayers) irrespective of their residency status. Unless the seller obtains a clearance certificate or declaration from the resident vendor, or the seller obtains a notice of variation from the non-resident vendor, the purchaser is required to withhold 10% at the time of settlement and remit this amount to the ATO.

Some exclusions to the withholding regime are detailed below.

Interaction of 10% withholding and general Capital Gains Tax Law

In general, non- residents are subject to Capital Gains Tax (CGT) on Taxable Australia Property (TAP). Similarly, the 10% withholding is limited to transactions dealing with TAP assets. The following assets are consider TAP:

Taxable Australian real property:

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 (e.g. shares in a “land rich” company). As per the Act, an indirect real property interest will exist where:
(a) a foreign resident has a 10% or more membership interest in an entity (the "non-portfolio test"); and
(b) more than 50% of the market value of the entity's assets is attributable to Australian real property (the "principal asset" test.

Options or rights to acquire any of the above asset types.

Exclusions from the withholding regime

Taxable Australian real property with a market value of less than $2 million.

an indirect Australian real property interest that provides a company title interest with a market value of less than $2 million

transactions conducted through an approved stock exchange or a crossing system

transactions subject to another withholding obligation

securities lending arrangements as these arrangements do not trigger a CGT liability for the Vendor and therefore no payment obligation is imposed

transactions where the Vendor is in external administration or transactions arising from the administration of a bankrupt estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law.

The 10% withholding should not affect the majority of the residential market due to the exclusion for real property valued at less than $2 million.

Australian Resident Vendors – Real Property – For Australian resident Vendors, it is possible to apply for a clearance certificate to the ATO. If this certificate is not provided, the Purchaser is required to remit 10% of the purchase price to the ATO. The clearance certificate is valid for 12 months and can be use by the Australian vendor for multiple transactions.

Australian Resident Vendors – Other Assets – For other assets that are not real property (for example units in a unit trust or shares in a company), a Purchaser can rely on a declaration made by the Vendor stating that the Vendor is not a foreign resident or the interest being sold is not an indirect Australian real property interest. The ATO has not yet issued standard declarations but have confirmed this can be inserted into a sale agreement as a contractual warranty. The declaration is valid for six months from the date of making the declaration.

Foreign Resident Vendors - This has been enacted to encourage foreign residents to lodge tax returns in Australia. The Vendor will be able to claim a refundable tax credit on lodgement of their tax return for the amount withheld. Vendors can apply for variations if they believe the 10% withholding is too high. Reasons for variation include:

the Vendor will not make a capital gain on the transaction (for example, because they will make a capital loss or a CGT roll-over applies)

the Vendor will not have an income tax liability (for example, because of carried-forward capital losses or tax losses)

a creditor of the Vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures

a creditor acquires legal title to the property (that is, becomes the Purchaser) as a result of an order for foreclosure and its security would be further diminished as a result of having to comply with the withholding obligation.

Purchasers – the liability for failure to withhold rests with the Purchaser. Therefore it is important to note that any penalty and interest charges applicable will be payable by the Purchaser and not the Seller. The withholding applies on a property by property basis (i.e. if the purchaser’s share of property is less than $2 million but the property is valued at more than $2 million, it may still be subject to withholding).
The amount payable to the ATO is on settlement date. As per the EM:

Ben is acquiring a residential property for $3 million. Ben knows that the Vendor of the property is a foreign resident and that the acquisition is subject to a withholding obligation. Ben enters into a contract for the purchase of the property on 1 August 2016 and pays a $150,000 deposit. The contract is settled on 1 October 2016 when Ben is required to pay the balance of $2.85 million to the Vendor and receives a transfer of title to the property.

Ben withholds $300,000 from the settlement amount (paying $2.55 million to the Vendor). Ben must pay the $300,000 to the Commissioner on the same day, 1 October 2016.

The Purchaser will be required to complete a Foreign Resident Capital Gains Withholding Purchaser Payment Notification form and will be required to disclose the details of the Vendor and the asset. Once the form is processed, a payment reference number will be issued and the payment can be made.

Practical implications of the withholding tax

The liability rests with the Purchaser and therefore it is extremely important to for the seller to get their clearance certificates prior to settlement to ensure there are no cash flow issues.

Where purchasing from multiple Vendors, there may be additional withholding requirements (i.e. to report the 10% withholding for each Vendor separately)

Where there are multiple Purchasers, the value of the property is taken into account and not the value attributable to each Purchaser in order to use the $2 million exclusion

When appropriate, the sale and purchase contract can include a Vendor’s declaration stating their residency to safeguard the Purchaser’s interests.

Non cash transactions may be caught where two parties may not be dealing at arm’s length.

Scrip for scrip transactions may be an issue where the Vendor is not eligible for CGT rollovers.

Davide Costanzo is a Director in the tax and business advisory division of Moore Stephens in Western Australia. His expertise is in tax consulting and tax compliance for SME business and corporate clients across a wide range of industries including engineering, property development, building and construction, manufacturing and mining and exploration. Davide’s work has required a comprehensive knowledge of taxation, accounting and commercial matters.

Varun Kumar is a Tax Manager in the tax and business advisory division of Moore Stephens in Western Australia. His expertise is in tax consulting and indirect taxes for SME business, corporate clients and government organisations in Australia.

Moore Stephens is an audit, accounting, tax and advisory firm that provides astute advice and practical solutions, which consistently deliver solid results. One of our specialties is to provide advice for individuals and companies interested in property development and investment activities in Australia. Having provided assistance to a number of foreign clients, we have built a unique depth and breadth of experience in this sector. Our advisers can assist you with your market entry strategy, implementing a tax efficient structure, handling operational issues and taking advantage of tax concessions available.