Client Update: Withholding tax on the sale of Australian property by foreign residents
19 November 2014
In brief: Treasury has released a discussion paper on the proposal to introduce a non-final withholding tax on the disposal of 'taxable Australian property' by foreign residents. Partner Katrina Parkyn looks at some of the key areas of discussion.
In May 2012, as part of the 2013-14 Budget, the then Federal Government announced the introduction of a non-final withholding tax on disposals of 'taxable Australian property' by foreign residents. The current Government announced in November 2013 its intention to proceed with the measure.
Treasury has now released a discussion paper seeking submissions on the design and implementation of the new regime, which is proposed to come into operation from 1 July 2016. The closing date for submissions is 28 November 2014.
The introduction of the new regime will affect foreign residents who dispose of taxable Australian property and purchasers who acquire taxable Australian property from foreign residents. Taxable Australian property includes direct and indirect interests in Australian real property and mining rights, as well as assets used to carry on business through a permanent establishment in Australia.
Foreign residents will be affected if they dispose of taxable Australian property on or after 1 July 2016. Under the new regime, 10 per cent of the proceeds payable on the transaction would be subject to a non-final withholding tax. It is 10 per cent of the sale proceeds; not 10 per cent of any profit from the sale. As a non-final withholding tax, the foreign resident would be required to lodge an Australian tax return in order to obtain a refund of any amount withheld in excess of the tax due (or pay any shortfall). Residential property transactions under $2.5 million are expected to be exempt from the new withholding rules.
Purchasers of taxable Australian property (including foreign residents) will also be affected, as they may have obligations to withhold and may be exposed to penalties if they fail to do so. While the obligation to withhold will only apply where the vendor is a foreign resident disposing of taxable Australian property, one of the key areas of consultation is the extent to which purchasers should be responsible for making enquiries to ascertain whether the vendor is a foreign resident and whether the property being acquired is taxable Australian property (which, as demonstrated by recent case law, can be very complicated and open to dispute when dealing with indirect interests). Depending on the outcome of the consultation, this may impose a significant due diligence burden on prospective purchasers.
The discussion paper seeks feedback on a number of practical issues that have already been identified as impacting on the design of the new regime. Some of the key areas for consultation include:
- The process for establishing whether a withholding obligation exists. This is expected to require some additional due diligence by purchasers (see above). Other options raised for consultation include:
- allowing a payer to rely upon a declaration given by a payee (unless they know it to be false);
- whether the Commissioner should be given a discretion to vary the withholding rate, upon request; and
- allowing a foreign resident vendor to apply for a 'clearance certificate' from the Commissioner to inform the payer that no withholding (or a reduced withholding) is required.
- The time at which any withholding obligation should arise, including in the context of instalment contracts and purchase price adjustments.
- Whether special arrangements are needed for:
- assets held by custodians, including whether the custodian, rather than the payer, should bear the withholding obligation;
- listed assets, particularly in the case of on market transactions; and
- highly geared assets, eg where 90 per cent of the consideration would be insufficient to discharge a mortgage.
Allens will be making a submission on the discussion paper and invites interested parties who have particular issues or concerns that they would like to see raised with Treasury to contact a member of the Allens Tax Group. The closing date for submissions is 28 November 2014.
- Charles ArmitagePartner,
Ph: +61 2 9230 4756
- Martin FryPartner, Practice Leader, Tax,
Ph: +61 3 9613 8610
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