New withholding tax regime for property

Property Council Australia interviews Davide Costanzo, director of Moore Stephens about the new withholding tax regime. On 1 July 2016, the Australian Government introduced a new measure to encourage non-resident vendors to meet their tax obligations. 

“The Australian Tax Office is concerned that non-resident taxpayers are not meeting their tax obligations when they sell Australian property. The solution is this new withholding tax regime,” Costanzo, Moore Stephens’ director of tax and business advisory in WA explains.

When a non-resident sells property with a market value of $2 million or more, the purchaser is now required to withhold 10 per cent of the purchase price, and remit this amount to the ATO.

“While this measure is aimed at non-residents, it affects all property vendors and purchasers of property over $2 million, irrespective of their residency status.

Costanzo offers the following example.

Ben is acquiring a residential property for $3 million. Ben knows that the vendor of the property is a foreign resident and that the acquisition is subject to a withholding obligation. Ben signs a contract and pays a $150,000 deposit. The contract is settled when Ben pays the balance of $2.85 million to the vendor and receives a transfer of title to the property.

However, Ben withholds $300,000 from the settlement amount, paying $2.55 million to the vendor. Ben must pay the $300,000 to the ATO on the same day.

Costanzo says the measure will have no impact on the majority of residential transactions, as most is valued at less than $2 million.

“But it’s important to emphasise that the liability rests with the purchaser. It is the responsibility of the purchaser to withhold the tax and send it to the ATO.

“And it means the purchaser, not the vendor, could be penalised for failing to correctly withhold the 10 per cent tax.”

Three main exemptions apply:
  1. Clearance certificate for direct property interests: the vendor gives the purchaser a certificate issued by the ATO that certifies that the vendor is an Australian resident.
  2. Declaration for indirect property interests: the vendor gives the purchaser a declaration that confirms the vendor is an Australian resident.
  3. Notice of variation: A non-resident vendor provides this when he or she expects the tax payable to the 10 per cent withholding.
Other exclusions apply, such as transactions conducted through an approved stock exchange or transactions subject to another withholding obligation.

“From the vendor perspective, if you don’t apply for the appropriate clearance certificate or provide the appropriate declaration, the purchaser will withhold 10 per cent of the purchase price, and you will be out of pocket until you lodge your tax return,” Costanzo explains.

“From the purchaser perspective, if you do not withhold 10 per cent, you could be hit with a substantial penalty.

“It’s a good law, because it captures non-residents and ensures they meet the same taxation obligations as Australian residents – but it’s important that people understand the law so they don’t get caught out.”