New rules to prevent foreign residents avoiding tax when they sell Australian property will affect everyone buying or selling property with a market value of $2 million or more from 1 July 2016. Many transactions involving shares in a company or units in a trust will also be caught.
From 1 July, a 10% withholding tax will apply when foreign residents sell certain types of Australian property. However, if you are selling Australian property, the new rules assume you are a non-resident unless you have a clearance certificate from the ATO. Without this clearance certificate, the purchaser can withhold 10% of the purchase price and pay this to the ATO. For purchasers, if you do not withhold the tax and do not have a clearance certificate, you are liable for the tax (on a $2 million property, that’s $200,000).
The good news is that the withholding tax does not apply to real property that has a market value of less than $2 million. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they are below the $2 million market value threshold.
Where there is more than one purchaser, the market values of all of the interests to be acquired need to be aggregated to determine whether the $2 million threshold applies. For example, if mum and dad are buying a property as joint tenants with a total market value of $3 million, the rules could be triggered even though their individual interest in the property is only worth $1.5 million.
I’m selling a property what do I need to do?
If you are selling real property affected by the new rules after 1 July and that property is likely to have a market value of $2 million or more, you need to apply for a clearance certificate from the ATO. Without this certificate, the purchaser of your property must assume you are a foreign resident and will be permitted to withhold 10% of the purchase price and remit it to the ATO.
When a certificate is issued by the ATO it remains valid for 12 months. The ATO has been developing an automated process for issuing a clearance certificate. The vendor (or an agent) will be able to complete an online application form. In straightforward cases the ATO expects that certificates will be issued within a matter of days.
I’m buying a property what do I need to do?
If you are buying real property affected by the new rules after 1 July and that property has a market value of $2 million or more, you need to ensure that you receive the clearance certificate from the vendor before settlement occurs. While the tax rules allow you to withhold 10% of the purchase price if the clearance certificate is not provided, it might also be a good idea to have this built into the sale contract to avoid any uncertainty.
If the sale proceeds and you don’t have a clearance certificate and have not withheld the tax, the tax liability rests with you, the purchaser.
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