Starting 1 July, 2016, Australians buying land from foreign resident vendors will be required to withhold 10% of the purchase price and pay it to the Australian Taxation Office (ATO).
The tax has been introduced to ease concerns that foreigners are not paying their fair share of tax when they dispose of Australian assets.
This new capital tax withholding regime will apply to taxable Australian real property (TARP) and indirect Australian real property interest, as well as those with an option or right to acquire such property or interest. Purchasers who fail to withhold may be penalised by interest costs.
However, properties with a market value of less than $2 million are exempted from the tax. Transactions undertaken on a stock exchange, securities lending arrangement, and bankruptcy arrangements are also exempted from the new regime.
Since the 10% withholding does not represent the final withholding tax, foreign resident vendors are still required to lodge an Australian tax return. They will also be entitled to claim a credit for the amount paid once they lodge their tax return.
Australian vendors are spared from the withholding tax provided they present evidence of being Australian tax residents. Those with TARP contracts or company title interests must obtain a clearance certificate valid for 12 months, although the application form for the certificate is yet to be released by the ATO. Vendors with other types of assets covered by the provisions must provide a residency declaration valid for a maximum of six months.
Without such documents, a vendor will automatically be considered a foreign resident.
It’s also not clear yet what effect the withholding tax will have on vendors who would be using the funds to pay off a mortgage.
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