Lawcovernotes August 2017

The newregime for foreign residents and investors buying Australian real estate Solicitors should bemindful of recent Budget changes and the likely impact on clients and their legal practice. Recently the Australian and NSWState governments announced significant Budget changes relating to foreign investors and residents. These changes will impact many clients. It is important that solicitors are aware of the changes and implement practical measures to protect their clients and legal practice. Australian Government Budget CGTwithholding payments regime The Australian Government introduced a new regime in July 2016 to prevent overseas vendors from remitting sale proceeds offshore before paying Australian CGT. Changes announced in the recent Australian Government Budget significantly increased the number of properties subject to the regime by reducing the threshold from a market value of $2m to $750,000. The new threshold applies to property bought on or after 1 July 2017. The withholding rate has also been increased from 10 to 12.5%. Given the new threshold and current market values, foreign vendors with properties in many metropolitan areas will be affected. Solicitors must be aware of this. How the regime works Purchasers of taxable Australian real estate or a company title interest valued at $750,000 or more must withhold 12.5% (or a varied amount specified by the Commissioner of Taxation) from the purchase price and remit that money to the Australian Taxation Office (ATO). Failure to do so will render the purchaser liable to CGT penalties and interest. The regime effectively passes on the obligation to remit payment from vendor to purchaser. The only exception is where, prior to completion, each vendor gives the purchaser a clearance certificate issued by the Deputy Commissioner of Taxation. The purchaser is entitled to rely on the clearance certificate. Vendors who are foreign residents cannot obtain a clearance certificate. They remain liable to pay the tax until the ATO has received payment from the purchaser. If solicitors are concerned that a purchaser will not pass on the withholding amount, they should consider options such as attending with the purchaser’s solicitor to complete payment. Options The regime also applies to options to purchase land over $750,000, even though the option consideration may only be 1% of the price of the land. A Vendor Declaration is required to avoid the purchaser having to remit 12.5% of the option fee, even though this may only be a small sum. Australian citizens living outside Australia Australian citizenship does not guarantee the issue of a clearance certificate. A certificate will not be granted to a vendor who is an Australian citizen living overseas and is not a resident for Australian tax purposes. However, Australian citizens who are not Australian Tax Residents may be able to obtain a variation notice. See the Taxation Administration Act 1953, sections 14 to 235 of Schedule 1. Removal of CGT exemption for main residence The Australian Government has also announced that foreign and temporary tax residents will no longer be exempt from CGT when selling their main residence in Australia. The new rule commenced from Budget night but will be grandfathered for existing properties until 30 June 2019. Legislation is currently being developed for this measure. 14.