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From 1 July 2016 all purchasers of Australian real estate must withhold and remit to the ATO 10 per cent of the purchase price if the vendor is a foreign resident, subject to some exemptions.
According to a note from Gadens authored by partners Jon Denovan and Elise Ivory, and director Cameron Steele, the new regime works on the presumption that all vendors are foreign residents until proven otherwise, and extends to indirect foreign ownership of real estate.
The key exemptions relevant to real estate sales are if the real estate has a market value of less than $2 million; and if the vendor obtains a clearance certificate from the ATO (the ATO promises an automated process).
“If no exemptions are available, the Commissioner of Taxation may vary the withholding amount, or reduce it to nil,” the lawyers said.
“Incoming mortgagees face no immediate problems as there is no provision imposing a charge on the land if your mortgagor fails to deduct 10 per cent when it purchases the property. However, the mortgagor may be pursued by the ATO for the 10 per cent not deducted. If the mortgagor is directly or indirectly foreign-owned, mortgagees will need to take account of the risk of a withholding on eventual sale.”
Gadens noted that a mortgagee hoping to receive 100 per cent of the net sale proceeds could receive only 90 per cent if a purchaser decides to withhold 10 per cent.
“The risk can be addressed by provisions in the sale contract (e.g. by ensuring a clearance certificate is provided). Mortgagees can of course elect not to release their security unless they receive the amount of money they stipulate,” the lawyers said.
“Remember that indirect foreign ownership of a vendor may trigger the obligation to withhold. The withholding applies to all types of real estate transactions including company title and options. As usual, there is devil in the detail, which is not described in this short summary.”
The lawyers suggest that when taking a new mortgage on real estate worth more than $2 million, you check that the vendor to your customer is not a foreign entity so there is no ‘surprise’ liability on your customer to withhold 10 per cent.
“One way is to always require a clearance certificate from the ATO,” they said.
“If financing customers with foreign ownership, find out how the withholding will apply to net sale proceeds on resale.”