On 31 October 2014, the Government released a Discussion Paper outlining the proposed design for introducing a 10 per cent non-final withholding tax on the disposal by foreign residents of certain items of Taxable Australian Property (TAP). The Discussion Paper follows the Government’s previous announcement in November 2013 and is based on the measures first introduced by the Labor Government in their 2013-14 Budget.
The Discussion Paper describes the proposed features of the non-final withholding tax regime and outlines considered alternatives for managing the compliance burden and related red-tape.
The current proposal will require the ‘payer’ in a TAP transaction to withhold 10 per cent of the proceeds payable in relation to the transaction where:
(i) the payee is a foreign resident; and
(ii) the transaction involves an asset that is ‘taxable Australian property’.
Under the measure, TAP includes direct and certain indirect interests in Australian real estate assets, as well as assets used in carrying on business through a PE in Australia.
As the tax is a ‘non-final’ withholding tax, the Australian tax obligation rests with the ‘payer’ in the transaction – who will be required to withhold and remit 10 per cent of the transaction proceeds. The tax remitted will thereafter be credited to the account of the foreign resident vendor for the purposes of calculating their Australian income tax position. For the purposes of utilising such credits, the foreign resident will need to lodge an Australian tax return in the relevant income year and have an Australian Tax File Number.
At this stage, the measure will not apply to residential property transactions under $2.5 million, but is likely to apply to vacant landholdings.
The intended start date for the new regime is 1 July 2016.
The Discussion Paper covers a range of design features and alternatives for the new regime, however the precise details are as yet to be determined, including the extent of the payer’s reporting requirements, the timing framework and the degree of inquiry required by a purchaser to determined whether the withholding measures will apply in a particular transaction.
The Discussion Paper is open for comment until 28 November 2014 and a copy of the discussion paper can be found here.
In light of the progress of these proposed measures, we are advising relevant parties (wishing to purchase and/or dispose of TAP in the short to medium term) to consider the impact of the proposed measures from a tax, cash flow and administrative perspective and to start forward planning now.