The ATO have become concerned regarding foreign investors involved in Capital Gains tax. Foreign investors have been buying property in Australia, later selling it for profit, and escaping without paying any capital gains tax. The ATO either cannot pursue the persons in foreign countries because there are no trade treaties between the countries or the hurdles are just so high that the ATO determines not to jump over them.
On the 25th of February 2016, the Foreign Investment Capital Gains Withholding laws were introduced. From 1 July 2016, purchasers will be required to hold 10% of the purchase price for all properties over 2 million dollars unless the vendor can produce a certificate from the ATO stating that the vendor is an Australian resident. The purpose of the regime is to enable the Commissioner in the collection of Capital Gains Tax payable by foreign residents.
This legislation only relates to properties over 2 million dollars. This will mean the following:
• If your client sells a house over 2 million dollars, they will need to make an application to the ATO to have foreign investment capital gains clearance.
• Where your client may be a group development selling to a single purchaser, every person in that group will need to seek a clearance certificate.
• A solicitor or tax agent may apply to the ATO online to obtain a clearance certificate. Licensed conveyancers will not be able to lodge such an application.
• This certificate must be provided to the purchaser prior to settlement so that the proceeds of the settlement can be paid to the vendor.
• Where no such certificate is applied for, the 10% of the purchase price will be remitted to the ATO without notice.
• Although a failure to have a certificate will not prevent the settlement, we have already experienced purchasers requesting the contracts be subject to the clearance certificate. Therefore, failure to have a clearance certificate may cause properties not to settle.
The ATO has now grabbed foreign investors at both ends. They need to pay $5,000 for the purchase and they need to pay a further $5,000 to seek approval to purchase property, and they will need to pay 10% of the sale price on the way out.
It is unlikely that any person will object to this legislation. Why should foreign nationals obtain a benefit over local citizens in relation to the payment of tax? The only thing we need to ask ourselves is, is this the tip of the iceberg? Will the threshold be lowered from $2 million and end up being nothing? When will it then apply to every sale not just foreign investment sales?
Every time the government puts their fingers into the property pie, the pie never tastes as good. Wherever bureaucracy reigns, innovation is sustained. Let’s hope this wise piece of legislation is not the start of something to come.