There are new rules to prevent foreign residents avoiding tax when they sell Australian property that will affect everyone buying or selling Australian property with a market value of $2 Million or more from 1 July 2016.
SELLING A PROPERTY:
From 1 July, a 10% withholding tax will apply when foreign residents sell certain types of Australian property. This is great as it stops non-residents from selling property and avoiding paying the tax on any profits they make. The annoying thing about this is that the new rules assume YOU are a non-resident unless you have a clearance certificate from the ATO. Without this clearance certificate, the purchaser of your property can withhold 10% of the purchase price and pay this to the ATO.
This is a frustrating step, but this is something your solicitor should be dealing with, so make sure you follow up with them to confirm it has been handled. Check out our article on the SURFing method for checking as well for 4 steps for checking financial documents and why it’s so important.
BUYING A PROPERTY:
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.
If you are selling real property affected by the new rules after 1 July 2016 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.
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.
