The sale and purchase of property is about to become more complicated.
The Australian Government is endeavouring to ensure that non-residents comply with their taxation obligations when they buy and sell Australian property and make a profit. However, in doing so the Government has imposed significant compliance obligations on vendors and purchasers and, in the process, will collect detailed information about vendors and their affairs.
In summary, from 1 July 2016 whenever a purchaser buys a property in Australia for a price of $2 million or more the purchaser must withhold 10% of the purchase price on settlement and immediately pay it to the Australian Taxation Office unless the vendor produces a tax clearance certificate. In effect the tax clearance certificate will confirm that the vendor is a resident of Australia who is complying with his or her Australian taxation obligations. If a vendor does not produce a tax clearance certificate on or before settlement the purchaser must remit 10% of the purchase price to the Australian Taxation Office on or before settlement and then pay the remaining 90% to the vendor.
If the purchaser fails to pay the withholding tax to the Australian Taxation office he or she will remain liable for the 10% withholding tax and a penalty equal to 100% of the withholding tax that should have been remitted.
This new withholding tax regime applies in respect of all sale contracts with a price of $2 million or more entered into on or after 1 July 2016 including sale contracts entered into on or after 1 July 2016 as a consequence of an exercise of an option entered into at an earlier time.
As a practical matter all vendors of real estate for a price of $2 million or more on or after 1 July 2016 must apply to the Australian Taxation Office for a tax clearance certificate well before the scheduled date of settlement so that the vendor can produce the tax clearance certificate to the purchaser on settlement to ensure the vendor receives 100% of the sale proceeds. The vendor will have to disclose significant information to the Australian Taxation Office to obtain a tax clearance certificate and presumably will have to be up-to-date with his or her tax compliance. Only time will tell what strategies the Australian Taxation Office will adopt.
The withholding tax regime also applies to sales and purchases of indirect interests in Australian real property via the acquisition of more than 10% of the shares in a company or units in a trust whose majority assets are real estate. It does not apply to the acquisition of shares or units listed on the stock exchange.