New CGT legislation will affect foreign property investors

by AB17 Feb 2016
Foreign residents disposing of Australian property will have to withhold 10% of capital gains proceeds to the Australian Taxation Office (ATO) under new measures before federal parliament, according to leading legal firm Creevey Russell Lawyers.

Creevey Russell Lawyers principal lawyer, Stuart O’Neill, said the capital gains tax (CGT) withholding obligation will apply to residential and commercial property, mining, quarrying or prospecting rights and interests in Australian entities.

The legislation was originally announced by the Gillard Labor government in May 2013 but once the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Bill 2015 is passed into law, it will likely commence for contracts entered into on or after July 1, 2016.

According to O’Neill, this means brokers with foreign investor clients will need to ensure all contracts are up to date.

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

However, O’Neill said lawyers and conveyancers will be able to apply for a ‘clearance certificate’ from the ATO to determine whether the amount must be withheld in a transaction.

“It will be the vendor’s obligation to produce the certificate prior to settlement to absolve a purchaser from the obligation to withhold,” he said.

“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.

“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.”