On 1 July 2016, new capital gains tax withholding laws came into effect around Australia.
The aim of the legislation is to recoup unpaid capital gains tax from foreign residents who dispose of property in Australia. However, the way in which the laws have been drafted mean that all parties to an agreement under which an interest in taxable Australian property is transferred will be forced to comply.
Contracts of Sale of Real Estate
The legislation affects all contracts of sale for real estate worth $2 million or more which are entered into from 1 July 2016. From this date, all purchasers under such contracts must withhold a total of 10% of the purchase price from the vendor unless they are provided with a clearance certificate by the vendor or the vendor’s solicitor which has been issued by the Australian Taxation Office. Penalties will apply if purchasers fail to comply with their obligations to withhold funds.
If the clearance certificate is not available in time for settlement, the purchaser must make arrangements for payment of the withheld amount to the ATO immediately after settlement.
Indirect real property interests
Transactions involving indirect real property interests (such as sales of shares in a company or units in a trust whose majority assets consist of real property) will also be affected.
Where an interest of 10% or more in such a company or trust is transferred, the vendor will be required to provide an appropriate declaration to the purchaser that the interest is not an indirect Australian real property interest.
Sales of company title interests worth at least $2 million will be subject to the new rules.
Option interests held over land will also be subject to the new regime. In those instances, at the time the option price is paid, 10% of that amount must be remitted to the ATO unless the vendor provides a clearance certificate or an appropriate declaration. When the option is later exercised, a total of 10% of the price paid to acquire the property less any amounts previously paid to the ATO in respect of the option price must be withheld in the absence of a clearance certificate or an appropriate declaration.
Option agreements entered into before 1 July 2016 where the exercise date is after 1 July 2016 will also be caught by the new rules and there is no minimum threshold on the market value of the option.
The new regime adds a layer of complexity to all affected real property transactions in Australia. It will be important that both vendors and purchasers are aware of their obligations in respect of their particular transaction for settlement to proceed smoothly.
If you require any further advice about these new laws, please contact our Property & Development team on 03 5445 3333.
Written by Mark Donaldson, Director at Beck Legal