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Withholding tax on the sale of Australian property by foreign residents

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By Evelyn Marcou, Senior Associate, MST Lawyers

In May 2012, as part of the 2013-14 Budget, the then Federal Government announced the introduction of a non-final withholding tax on disposals of ‘taxable Australian property’ by foreign residents. The current Government announced in November 2013 its intention to proceed with the measure.  Treasury has now released a discussion paper seeking submissions on the design and implementation of the new regime, which is proposed to come into operation from 1 July 2016.

The introduction of the new regime will affect foreign residents who dispose of taxable Australian property and purchasers who acquire taxable Australian property from foreign residents. Taxable Australian property includes direct and indirect interests in Australian real property and mining rights, as well as assets used to carry on business through a permanent establishment in Australia.

Foreign residents will be affected if they dispose of taxable Australian property on or after 1 July 2016. Under the new regime, 10 per cent of the proceeds payable on the transaction would be subject to a non-final withholding tax. It is 10 per cent of the sale proceeds, not 10 per cent of any profit from the sale. As a non-final withholding tax, the foreign resident would be required to lodge an Australian tax return in order to obtain a refund of any amount withheld in excess of the tax due (or pay any shortfall). Residential property transactions under $2.5 million are expected to be exempt from the new withholding rules.

Purchasers of taxable Australian property (including foreign residents) will also be affected, as they may have obligations to withhold and may be exposed to penalties if they fail to do so. While the obligation to withhold will only apply where the vendor is a foreign resident disposing of taxable Australian property, one of the key areas of consultation is the extent to which purchasers should be responsible for making enquiries to ascertain whether the vendor is a foreign resident and whether the property being acquired is taxable Australian property (which, as demonstrated by recent case law, can be very complicated and open to dispute when dealing with indirect interests). Depending on the outcome of the consultation, this may impose a significant due diligence burden on prospective purchasers.

For more information regarding the sale of Australian property, please contact our Property & Leasing team by email property@mst.com.au or by telephone +61 8540 0200.