Regardless of whether you are a foreign person or an Australian resident, the new withholding tax legislation ('tax legislation') may affect you if you are involved in a transaction relating to the sale or purchase of Australian real property, with a purchase price of more than $2 Million.
There are also several other methods of the disposal of real property which can trigger the tax legislation including transferring/acquisition of leases, exercise of options, acquiring interest in Australian entities where real property or interests are the major assets. These areas are not without their complexity and will not be canvassed in this article.
Subject to some exceptions (which will be detailed further below), if a contract is formed wherein real property being sold achieves a sale price of more than $2 Million, then either:
Prior to settlement of the matter, the Vendor must provide the Purchaser with a clearance certificate or variation certificate issued by the Australian Tax Office (ATO) which is current at the time it is given to the Purchaser; or
If the Purchaser has not received a current clearance certificate or variation certificate issued by the ATO from the Vendor prior to the settlement, then, generally:
The Purchaser is required to withhold the sum equivalent to 10% of the purchase price of the property including any adjustments made to that amount (however the calculation of this amount can become somewhat complex if the contract includes GST or whether it is an arm’s length transaction – legal advice should be sought in relation to individual transactions); and
Pay the withheld amount directly to the ATO.
The payment of the withheld amount discharges the liability (including penalties and interest charges) which the Purchaser may have had in relation to the specific transaction under this legislation.
The Purchaser is not required to withhold any funds if the Vendor has complied with the obligation to provide a current clearance or variation certificate to the Purchaser prior to settlement.
If the Vendor fails to comply with the above requirement, they cannot refuse to settle on the basis of the Purchaser deducting withholding tax from the balance of the purchase price at settlement.
This legislation is new, and has not been used widely in practice. It is also significantly complex, and each individual contract will turn on its own facts.
Reference: Affinity Lawyers