Withholding tax for foreign resident asset sales

March 2015

The Government has announced it will proceed with the 10% non-final withholding tax to support the operation of foreign resident CGT regime from 1 July 2016. 

The withholding tax will apply when a foreign resident disposes of certain taxable Australian property, with the purchaser required to withhold 10% of the proceeds from the sale to be remitted to the ATO. 

The new regime will not apply to residential property transactions valued below $2.5 million, which means the majority of house sales won't be affected. Of course if you live in Sydney, that may not be the case.  

Protecting the integrity of CGT 

Why the withholding tax? The new regime is designed to protect the integrity of the foreign resident CGT regime, however it will also apply where Australian 'real property' assets are disposed of by a foreign resident and it is likely it will generate gains that will be taxable as ordinary income, rather than as a capital gain. 

The practicalities and issues for purchasers

There are, however some practical issues to be addressed. The core questions that the consultation process needs to address include:
  • Where the obligations arise to collect the withholding tax
  • Pre-payment of tax liabilities by the vendor
  • Removing the withholding obligation where it can be shown no gain will arise
  • Streamlining any payments required, including the use of intermediaries. 

A more fundamental practicality, however, is how a purchaser will be able to assess whether the vendor is a foreign resident as well as how they withhold the tax from the sale. 

Additionally, if the purchaser is also a foreign resident, what are the practicalities of enforcing the withholding obligation? 

The Government has said it will consult widely on matters such as the design and implementation of the regime to minimise compliance costs, as well as the issues above. 

Whether there is sufficient time to address these issues ahead of 1 July 2016 remains to be seen. 

A $5,000 fee for foreign buyers? 

In late February, Treasurer Joe Hockey announced a raft of changes to laws that enable foreign buyers to buy Australian property, whether they are temporary residents or non-resident.

Responding to issues about the Foreign Investment Review Board's (FIRB) lack of enforcement of foreign investment rules, the Treasurer announced in February that a $5,000 AUD fee would be payable by foreign buyers for properties under $1 million, while a $10,000 AUD fee would be payable for every $1 million dollars on properties valued at greater than $1 million. 

Skirting the FIRB rules

Questions have been raised about the ability of foreign buyers to circumvent the FIRB by Acquiring property via Australian established structures such as trusts. 

With most acquisitions of property by foreign residents likely to need FIRB approval, this is increasingly likely to be on the government's radar. What remains unclear is how it will tie into the withholding tax requirements when a foreign resident decides to sell. 

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This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.

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