Foreign owners to be hit by tougher CGT obligations

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The sale of Australian property by foreign owners could soon be covered by tougher capital gains tax legislation, however new laws would unlikely apply to the bulk of residential properties sold by foreign investors.

In May 2013, the then Labor Government announced that foreign residents disposing of Australian property would be required to handover 10% of the sale price to the Australian Taxation Office.

The proposal is now before parliament as part of the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 and would come into effect from 1 July if it is passed into to law.

Under the new legislation the tax requirement would apply to all real property - land, buildings, residential and commercial – in Australia that is sold by foreign owners, as well as mining, quarrying or prospecting rights.

Stuart O’Neill, principal lawyer at law firm Creevey Russell lawyers said professionals, such as agents or lawyers, acting for the vendor will need to include the obligation that 10% of sale price has to be withheld for the ATO, though it is unlikely to be needed in the majority of residential transactions involving foreign owners.

“Lawyers, conveyancers, agents and brokers acting for affected foreign resident vendors will need to include the withholding obligation in their sale contracts,” O’Neill said.

“The withholding regime will not affect property transactions under $2 million (thus excluding most residential property sales), transactions completed on an approved stock exchange or disposals by a foreign resident who is bankrupt or under external administration,” he said.

Purchasers will be required to withhold the amount destined for the ATO, unless the vendor provides a clearance certificate to abdicate them of that responsibility.

“It will be the vendor’s obligation to produce the certificate prior to settlement to absolve a purchaser from the obligation to withhold. We expect affected vendors will bear the cost of obtaining the certificate.  If a purchaser fails to withhold, they will be liable for a penalty equal to the amount that was required to be withheld,” O’Neill said.

“When purchasers withhold, they will have to pay the amount to the ATO with a remittance form that sets out the details of the vendor, the purchaser and the asset acquired. While the withholding regime is intended to protect the integrity of the CGT regime, it may equally apply where the disposal is likely to generate revenue gains taxable as ordinary income.”

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