Last year the Government introduced the Foreign Resident Capital Gains Tax Withholding measures.

These measures were framed so that from 1 July 2016, a person acquiring interests in:

  • Land, or
  • Interests in a company or trust that owns land,

valued at $2 million or more from a non-resident needed to pay tax equal to 10% of the value of the land or the interests in the company or trust to the ATO.

In the Budget on 9 May 2017, the Government changed the rules to reduce the threshold at which tax would need to be withheld from $2,000,000 to $750,000. The Government also increased the rate of withholding to 12.5%.

The Government announced that these changes will come into effect on 1 July 2017.

The Government has introduced the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 (Bill) to give effect to these changes. The Bill has been referred to a Senate committee that is due to report by 13 June 2017.

The practical effect of the changes is that if someone is acquiring:

  • Land, or
  • Interests in a company or trust that owns land,

valued at $750,000 or more after 30 June 2017, the transferor will need to obtain a tax clearance certificate from the ATO to provide to the transferee at settlement.

Unless there is such a certificate, the purchaser will need to withhold 12.5% of the value of the property or interest in the company or trust and remit it to the ATO.

Given the much smaller threshold amount, the number of transactions affected has expanded enormously. On 20 April 2017, the ABC reported that the median house price in Melbourne in the first quarter of 2017 was $826,000. Therefore, these measures will apply to more than 50% of house sales in Melbourne.

It is important to remember that these rules apply when a person acquires interests in a company or trust that owns real property. As no transfer of land is prepared in these cases, the purchaser’s obligations to pay tax to the ATO unless there is a tax clearance certificate may be overlooked.

These rules also can apply even if no consideration changes hands (for example, if there is a transfer between related parties).

If a purchaser fails to withhold the amount from a payment to the vendor, the purchaser may end up paying the full purchase price to the vendor and then find they also must pay an amount equal to 12.5% of the value of the property to the ATO. The purchaser then would need to try and recover that amount from the vendor (and may have difficulty doing that).

If you require advice on these changes please contact Patrick Cussen.