Potential Tax Withholding Obligation for Foreign Residents Selling Australian Property

Property Taxes in Australia

On 8 July 2015, the Government released draft legislation which proposes to impose a 10% non-final withholding obligation on the purchase of Australian property from a vendor who the purchase has reasonable grounds to believe is a foreign resident. This means that if a purchaser purchases an Australian property from a foreign person for $5 million the purchaser will be required to withhold $500,000 from the purchase price and pay this to the ATO. The foreign resident will receive $4.5 million net of the withholding tax.

The proposed amendment if passed by law is to apply for properties purchased after 1 July 2016. The withholding obligation will apply to:

  • Sales of direct interests in Australian real property (e.g. a foreign person sells a property they own);
  • Sale of indirect interests in Australian real property (e.g. a foreign persons sells shares in a company which owns a property in Australia); or
  • An option or right to acquire the above interests.

The withholding obligation on the purchaser will not apply where a residential property is valued at less than $2.5 million.

Foreign residents are required to pay capital gains tax on the sale of properties located in Australia or a sale of Australian property through an indirect interest (e.g. shares in a company owning Australian property). The government has proposed the withholding requirement to ensure that capital gains tax is collected from foreign residents who sell Australian property but may not be registered on the Australian tax system. Despite this the withholding obligation on the purchaser to collect and pay the tax to the ATO will impose additional administrative burden particularly if it is a private purchaser. The ATO have yet to release how administratively the withholding regime will operate.

The 10% withholding tax is a non-final withholding tax which means that a foreign resident still has an obligation to file a tax return declaring the capital gain so that the correct amount of tax can be calculated. The 10% already withheld should be available as a tax credit against capital gains tax payable on the transaction.

Our specialist business advisory services can help manage these proposed changes. For further information on the above or the CGT consequences on transactions undertaken by foreign residents please contact us.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.