Australian Government makes substantial changes to foreign resident withholding tax regime
Robert Lyons and Darren Anderson of Broadley Rees Hogan, lawyers in Brisbane, provide an update on FRCGW changes set to impact foreign residents purchasing certain Australian assets.
On 9 May 2017, Australia's Federal Government announced substantial changes to the rate and threshold of its Foreign Resident Capital Gains Withholding (FRCGW) regime which has been in force since 1st July 2016. Robert Lyons and Darren Anderson of BRH Lawyers in Brisbane explain below what has changed and what foreign residents purchasing property in Australia need to be alive to.
To recap, the regime requires buyers of certain assets to withhold and remit to the Australian Tax Office (ATO) on or before settlement, a portion of the purchase price, unless the vendor can demonstrate that he/she was an Australian resident at the time that the transaction was entered into. The way in which the vendor can demonstrate it is an Australian resident is to obtain and give to the purchaser a Clearance Certificate issued by the ATO (or in the case of certain assets, by completing and providing a Withholding Declaration to the purchaser).
What has changed
1. Disposals of a direct interest in Australian real property from 1st July 2017 (where contracts are signed after 1st July 2017) will be captured by the FRCGW regime where the market value is $750,000 or more. (Currently the regime is only invoked where there is a market value of $2 million or more). Where the purchaser and vendor are at arm’s length, the ATO will accept the purchase price as the market value; and
2. All such contracts settled on or after 1st July 2017 where the FRCGW applies will be subject to a withholding tax rate of 12.5% (currently the withholding tax rate is 10%).
When the changes come into force
The FRCGW regime is based on the time of the Australian property acquisition. A buyer is generally considered to have acquired property on the day they enter into the contract to purchase the property. Consequently:
- The changes only apply to contracts entered into on or after 1st July 2017
- If a contract is entered into before 1st July 2017, the current $2 million threshold and 10% withholding rate will apply, even if settlement occurs on or after 1st July 2017.
This interpretation has been confirmed in the Explanatory Memorandum to the relevant Bill that is currently in Parliament.
What should vendors and buyers do?
Aside from making themselves aware of the new threshold and rate, there should be no change to existing practice. In other words, vendors of property captured by the regime should continue to promptly obtain and issue the purchaser a Clearance Certificate in order to prevent the purchaser from withholding a portion of the purchase price. Purchasers should also ensure that if they do not receive a Clearance Certificate, they withhold the relevant portion so as to avoid substantial penalties.
The main consequence of the changes will be the huge increase in the number of transactions covered by the FRCGW regime. In cities such as Sydney and Melbourne in particular, where median house prices are substantially above the proposed $750,000 threshold, it is anticipated that the vast majority of property transactions will be covered.