Tucker talks tax: Overseas property investor changes

This article provides you with the technical 'nuts and bolts' associated with our latest 'Tucker talks tax' video.

2016-03-09

In our latest Tucker talks tax video, Associate Director – Tax, Simon Tucker, provided his insight into two significant tax changes in relation to property investment for non-Australian residents:

  1. Victorian absentee owner land tax surcharge
  2. Foreign resident CGT withholding tax

To ensure you are prepared for these tax changes, we have put together the technical ‘nuts and bolts’ underpinning these significant tax changes.

The (damn) fine print

Victorian absentee owner land tax surcharge

  1. The absentee owner surcharge will commence from 1 January 2016 and will apply to owners of Victorian land at a rate of 0.5%.
  2. The surcharge does not apply if the property is exempt from land tax or its site value is below the land value threshold that applies for ordinary land tax assessments.
  3. The surcharge will not apply to trusts that are listed, widely held or registered as wholesale unit trust schemes – this exemption also applies to any wholly owned sub trusts of an exempted head trust.
  4. The Treasurer/ State Revenue Office (“SRO”) has discretion to treat a resident absentee company (i.e. a company incorporated in Australia but foreign owned) as not being foreign owned for the purpose of the absentee owner surcharge, and as a consequence exempt from the additional tax. 
  5. Broadly speaking, the exemption may be granted by the SRO / Treasurer if it can be demonstrated that the foreign controlled land holding company conducts a commercial operation in Australia whose commercial activities makes a strong and positive contribution to the Victorian economy and community by engaging local labour and utilising local materials and services. 
  6. This exemption is only available to companies, so if the direct land holder is a trust, the exception will not apply.

Foreign resident CGT withholding tax

  1. The foreign resident CGT withholding regime will apply to the sale of all taxable Australian real estate (i.e. Australian land), some indirect Australian land (e.g. shares in a land rich company) and options over such asset. 
  2. If a sale is subject to foreign resident withholding, the tax that is withheld and paid to the ATO by the purchaser will be applied as a credit against the income tax payable when the foreign investors lodges their annual income tax return.
  3. The foreign resident CGT withholding tax can apply to a resident vendor and potentially to a foreign vendor in relation to non-land.
  4. To avoid withholding in these cases, the vendor can present to the purchaser:
    • a residency clearance certificate (issued by the ATO) required in respect of direct land sales
    • a declaration that the vendor is not a resident (self-prepared) in respect of indirect land
    • a declaration that the shares, units or other trust interest being disposed are not indirect land asset (self-prepared) in respect of a foreign resident vendor.
  5. There are also a number of exceptions that will apply that will mean that the foreign resident CGT withholding tax will not be required. The most prevalent of these are expected to be:
    • in relation to direct land – market value of the land is less than $2m
    • in relation to indirect land – the interest in the land is acquired on a stock exchange.
  6. If one of the exception criteria does not apply and the vendor does not have the requisite ATO clearance certificate or a declaration, then broadly speaking a purchaser will be required to withhold tax at 10% of the gross sale proceeds. A failure to do so will give rise to a penalty for the purchaser.
  7. A foreign resident vendor is able to request for the Commissioner to reduce the rate of withholding in certain circumstances, for example if the foreign resident is not expected to make a capital gain because of carried forward capital losses.

So remember, investing in property shouldn’t be taxing.

Contact Simon Tucker if you would like to know more about the latest tax changes in your industry.