Buying or Selling Property – 10% Withholding Tax on the Sale of Australian Property by Foreign Residents

The government announced on 14 May 2013 that it would introduce a 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property. The Bill for this measure, introduced by the current Government has been passed and received Royal Assent on 25 February 2016.

The new withholding regime will apply to contracts entered into on or after 1 July 2016.

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).

You can probably already see the problem here. Until everyone gets used to this new system there are likely to be quite a few issues where property contracts don’t mention the withholding tax, no clearance certificate is provided, and no tax is withheld on settlement.

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.

What assets are affected?

The new withholding rules capture: 

  • Taxable Australian real property – such as residential property, commercial property, land etc., situated in Australia as well as certain mining, quarrying or prospecting rights;

  • Indirect Australian real property interests (i.e., shares in a company or units in a trust where certain conditions are met). This is generally where most of the value of the company or trust relates to real property holdings in Australia; and

  • Options or rights relating to the points above.

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.

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.

2016 – 2017 Budget – Changes to Superannuation

There are a number of major changes to superannuation from the 2016-17 budget announcements.  These include:

  • A $500,000 lifetime non-concessional contributions cap from Budget night

  • A reduction in concessional contribution cap from 1 July 2017

  • The removal of the tax exemption on earnings supporting transition to retirement income streams (TRIS) from 1 July 2017

  • The extension of the 30% super contributions tax on high income earners

  • Tax free super balances capped at $1.6m from 1 July 2017

What should you be doing?

The main area to be mindful of is the $500,000 lifetime cap on non-concessional contributions as what you do now, may have a lasting and potentially detrimental impact.

Under the current rules, you can use the ‘bring forward rule’ and contribute up to $540,000 across a 3 year period to your super fund.  Anyone utilising these rules in the current year may find that the proposed rules, if they come into effect, will radically change their position.

It’s really important that anyone contemplating making large contributions to super or utilising the bring forward rule, get advice first.