New rules to prevent foreign residents avoiding tax when they sell Australian property will affect everyone buying or selling property with a market value of $2 million or more from 1 July 2016. Many transactions involving shares in a company or units in a trust will also be caught.
From 1 July, a 10% withholding tax will apply when foreign residents sell certain types of Australian property. However, if you are selling Australian property, the new rules assume you are a non-resident unless you have a clearance certificate from the ATO. Without this clearance certificate, the purchaser can withhold 10% of the purchase price and pay this to the ATO. For purchasers, if you do not withhold the tax and do not have a clearance certificate, you are liable for the tax (on a $2 million property, that’s $200,000).
You can probably already see the problem here. Until everyone gets used to this new system there are likely to be quite a few issues where property contracts don’t mention the withholding tax, no clearance certificate is provided, and no tax is withheld on settlement.
The good news is that the withholding tax does not apply to real property that has a market value of less than $2 million. This exclusion can apply to residential dwellings, commercial premises, vacant land, strata title units, easements and leasehold interests as long as they are below the $2 million market value threshold.
Where there is more than one purchaser, the market values of all of the interests to be acquired need to be aggregated to determine whether the $2 million threshold applies. For example, if mum and dad are buying a property as joint tenants with a total market value of $3 million, the rules could be triggered even though their individual interest in the property is only worth $1.5 million.
The $2 million exclusion does not apply to indirect interests in Australian real property such as shares in a company or units in a trust that hold real property in Australia. However, the exclusion can apply to company title arrangements, where someone holds shares in a company which provides them with a right to occupy part or all of the property that is owned by the company. This ensures that company title arrangements are treated in the same way as properties held under strata title.
The other main exception is when the foreign resident vendor is under external administration (for a company) or is bankrupt (for an individual). This is to ensure that the withholding tax rules do not disturb the priority of other creditors.
What ‘property’ is affected by the new rules?
The new withholding rules capture:
Taxable Australian real property – such as residential property, commercial property, land etc., situated in Australia as well as certain mining, quarrying or prospecting rights;
Indirect Australian real property interests (i.e., shares in a company or units in a trust where certain conditions are met). This is generally where most of the value of the company or trust relates to real property holdings in Australia; and
Options or rights relating to the points above.
I’m selling a property what do I need to do?
If you are selling real property affected by the new rules after 1 July and that property is likely to have a market value of $2 million or more, you need to apply for a clearance certificate from the ATO. Without this certificate, the purchaser of your property must assume you are a foreign resident and will be permitted to withhold 10% of the purchase price and remit it to the ATO.
When a certificate is issued by the ATO it remains valid for 12 months. The ATO has been developing an automated process for issuing a clearance certificate. The vendor (or an agent) will be able to complete an online application form. In straightforward cases the ATO expects that certificates will be issued within a matter of days.
I’m buying a property what do I need to do?
If you are buying real propertyaffected by the new rules after 1 July and that property has a market value of $2 million or more, you need to ensure that you receive the clearance certificate from the vendor before settlement occurs. While the tax rules allow you to withhold 10% of the purchase price if the clearance certificate is not provided, it might also be a good idea to have this built into the sale contract to avoid any uncertainty.
If the sale proceeds and you don’t have a clearance certificate and have not withheld the tax, the tax liability rests with you, the purchaser.
Buying or selling indirect property interests – shares in a company or unit trust
If you are buying or selling shares in a company or units in a trust then a withholding obligation can also be triggered, even if the company or trust does not hold any real property interests in Australia. In this case the process of validating whether or not a withholding obligation exists is slightly different.
Withholding will be required if either:
The purchaser knows or has reasonable grounds to believe that the vendor is a foreign resident; or
The purchaser does not have reasonable grounds to believe that the vendor is an Australian resident and either the purchaser has a foreign address for the vendor or they are authorised to make payment to a place outside Australia.
In these circumstances the vendor can make a declaration to the purchaser confirming that they are an Australian resident to ensure that the withholding tax does not apply. In general you would expect to see these declarations in the sale agreements as warranties.
A vendor can also make a declaration confirming that shares in a company or units in a trust are not classified as an indirect Australian real property interest. Shares or units that are not classified as an indirect Australian real property interest and do not relate to company title arrangements are outside the scope of the withholding rules.
Can we vary the withholding tax?
The Commissioner has the power to vary the amount that is payable under these rules. Either a vendor or purchaser may apply to vary the amount to be paid to the ATO. This might be appropriate in cases where:
The foreign resident vendor will not make a capital gain as a result of the transaction (e.g., they will make a capital loss on the sale of the asset);
The foreign resident will not have a tax liability for that income year (e.g., where they have carried forward capital losses or tax losses etc.,); or
Where there are multiple vendors, but they are not all foreign residents.
If the Commissioner agrees to vary the amount, it is only effective if it is provided to the purchaser before settlement occurs.
Impending blowout from the leaked ‘Panama Papers’
Editor: Clients may have recently heard something about an unknown source who has leaked 11.5 million documents from the Panamanian law firm of Mossack Fonseca.
Basically, the documents illustrate how many wealthy individuals hide their money from tax authorities.
Under a plan devised by the Commissioner of Taxation, Chris Jordan, 35 countries have agreed to mount the most ambitious international investigation in history to hunt down tax evaders identified in the Panama Papers leak.
About 800 Australians are listed in the files of Panama law firm Mossack Fonseca, from which confidential correspondence was leaked, and 80 of those are identified in the Australian Crime Commission’s (ACC’s) database for serious and organised crime.
The ATO says that it has now linked over 120 of them to an associate offshore service provider located in Hong Kong.
Deputy Commissioner, Michael Cranston, said that “The information we have includes a large number of taxpayers who haven’t previously come forward, including high wealth individuals, and we are already taking action on those cases”.
The documents from Mossack Fonseca have been exposed in a global media project led by the International Consortium of Investigative Journalists (ICIJ).
The ICIJ plans to release the names of all of the 240,000 offshore entities set up by Mossack Fonseca, along with directors and shareholders, next month.
Gold Coast businesses under the ATO’s microscope
As part of an ongoing, Australia-wide program, the ATO has advised that it will be visiting restaurants, cafés and take-aways, along with hair salons and nail bars, on the Gold Coast.
Assistant Commissioner Matthew Bambrick said “In all, we’ll be visiting around 250 businesses in the Gold Coast to talk about a range of topics, including business registration, record-keeping, superannuation and lodgment.”
“Where taxpayers are unwilling to work with us or continue to cause us concern, we will undertake further investigation. In Sydney and Melbourne, for example, we have now moved to auditing businesses that didn’t want to work with us.”
ATO – SuperStream deadline rapidly approaching
With the SuperStream deadline of 30 June rapidly approaching, ATO Deputy Commissioner James O’Halloran says now is the time for employers who are not yet using SuperStream to cross it off their to-do list.
SuperStream is the new way employers must pay super. It means paying super and sending employee information electronically.
More than 60% of all Australia’s small businesses are now using SuperStream.
“Employers who are using SuperStream have reduced the time they spend on super by an average of around 70%, each cycle,” says Mr O’Halloran.
“We are encouraging the remaining employers who have not yet adopted SuperStream to do so before 28 April.”
“By taking action now employers will have a chance to test their SuperStream solution and ensure things are running smoothly and eliminate any stress around the 30 June deadline”, says Mr O’Halloran.
ATO’s ‘High risk industries’ for super guarantee
Each year, the ATO identifies industries that they believe are at risk of not meeting their super guarantee obligations for eligible employees.
This year they are looking at these industries:
Letters will be sent to clients in these industries advising of planned audits from July 2016.
Lifestyle assets and CGT
The ATO has advised that it has identified some instances where lifestyle assets, such as artworks and collectables, are not being properly accounted for.
They said that they want to help taxpayers with these kinds of assets comply and be aware they may be subject to CGT on disposal.
They said that it’s important taxpayers are aware that:
The ATO is currently working with insurance companies to identify owners of these sorts of assets.
Editor: Clients who may be affected should contact our office.
New rules for selling property over $2 million
From 1 July 2016, new rules will apply to sales of taxable Australian property (e.g., real estate) with a market value of $2 million or above.
A 10% non-final withholding tax may be applied to all contracts to sell such property entered into on or after 1 July 2016.
Australian resident vendors selling such property will need to obtain a clearance certificate from the ATO prior to settlement to avoid the 10% non-final withholding tax.
Editor: This new 10% withholding tax was really only intended to apply to non-residents selling Australian property.
However, it equally applies to Australian resident vendors and forces them to obtain a clearance certificate from the ATO to, in fact, prove that they are Australian residents.
Generally speaking, clients will be affected for sales of residential and commercial properties, or companies or trusts that hold such properties.
Contractor payments data matching program
The ATO has advised that it is continuing its Contractor payments data-matching program.
It will acquire data from businesses that it visits as part of its employer obligations compliance program during the 2016/17, 2017/18 and 2018/19 financial years.
The data collected from businesses is used to identify contractors that may not be meeting their taxation obligations through:
This is an ongoing data matching program and has been conducted for more than five years.
From 1 July 2016, the 32.5% personal income tax threshold will increase from $80,000 to $87,000 in an attempt to address tax bracket creep. The Government expects this will stop around 500,000 taxpayers facing the 37% marginal tax rate and prevent average full-time wage earners from moving into the second-top tax bracket until 2019–2020.
The below table shows the proposed personal income tax thresholds and the effect on the tax payable:
Current tax payable
$0 – $18,200
$18,201 – $37,000
+ 19% of excess over $18,200
$37,001 – $87,000
+ 32.5% of excess over $37,000
$87,001 – $180,000
+ 37% of excess over $87,000
+ 45% of excess over $180,000
In the lead-up to the Budget, the Treasurer indicated that the 2% Budget deficit levy (tax) on incomes over $180,000 would not be extended beyond its initial three years. The levy applies for three years from 1 July 2014, and is due to cease at the end of the 2016–2017 financial year.
The Government intends to reduce the company tax rate to 25% over the next 11 income years.
The measure will be phased in from 1 July 2016, depending on company size (ie aggregated annual turnover). Small businesses will benefit sooner. The phase-in for all companies will be completed in the 2026–2027 income year.
Franking credits will continue to be calculated in the usual manner, by reference to the amount of tax paid by the company making the distribution.
The small business entity threshold will increase from $2 million to $10 million from 1 July 2016.
As a result, a business with an aggregated annual turnover of less than $10 million will be able to access a number of small business tax concessions, including:
The threshold changes will not affect eligibility for the small business CGT concessions, which will only remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test (and other relevant conditions such as the active asset test).
The company tax rate for small business entities will reduce to 27.5% (from 28.5%) from the 2016–2017 income year. The rate is set to reduce further to 27% in 2024–2025 and then by one percentage point per year until it reaches 25% in 2026–2027.
To complement the company tax rate reductions, the tax discount (or tax offset) for unincorporated small businesses (eg sole traders and partners in a partnership) will increase over a 10-year period from 5% to 10%.
The tax discount will increase to 8% on 1 July 2016, remain constant at 8% for eight years, then increase to 10% in 2024–2025 and13% in 2025–2026, reaching a new permanent discount of 16% in 2026–2027. The maximum value of the discount will remain at $1,000.
From 1 July 2016, access to the discount will be extended to individual taxpayers with business income from an unincorporated business that has an aggregated annual turnover of less than $5 million (the current threshold is $2 million).
From 1 July 2017, GST will be imposed on goods imported by consumers, regardless of the goods’ value. The GST liability will be imposed on overseas suppliers, using a vendor registration model. This means suppliers with Australian turnover of $75,000 or more will be required to register for, collect and remit GST for all goods supplied to consumers in Australia.
These arrangements will be reviewed after two years to “ensure they are operating as intended and take account of any international developments”.
From 1 July 2016, the Government proposes to extend the option for taxpayers to use the cash basis of accounting for GST to small businesses with an annual turnover of less than $10 million. Such entities would be able to account for GST on a cash basis and pay GST instalments as calculated by the ATO.
From 1 July 2017, the Government proposes to introduce a transfer balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into a tax-free “retirement account“ (also known as retirement phase or pension phase). Subsequent earnings on these pension transfer balances will not be restricted.
This transfer balance cap for amounts transferred into pension phase is intended to limit the extent to which the tax-free benefits of retirement phase accounts can be used for tax and estate planning.
A lifetime non-concessional contributions cap of $500,000 is effective from 7.30 pm (AEST) on 3 May 2016. The lifetime non-concessional cap (indexed) will replace the existing cap of up to $180,000 per year (or $540,000 every three years under the bring-forward rule for individuals under 65).
The $500,000 lifetime cap will take into account all non-concessional contributions made on or after 1 July 2007. Contributions made before 7.30 pm AEST on 3 May 2016 cannot result in an excess of the lifetime cap. However, excess non-concessional contributions made after commencement will need to be removed or be subject to penalty tax. The cap will be indexed to average weekly ordinary time earnings (AWOTE).
The annual concessional contributions cap will be reduced to $25,000 for all individuals, regardless of age, from 1 July 2017. The cap will be indexed in line with wages growth.
The concessional contributions cap is currently set for the 2015–2016 and 2016–2017 income years at $30,000 for those under age 49 on 30 June of the previous income year (or $35,000 for those aged 49 or over on 30 June of the previous income year).
Members of defined benefit schemes will be permitted to make concessional contributions to accumulation schemes. However, the $25,000 cap will be reduced by the amount of their “notional contributions”.
From 1 July 2017, individuals with a superannuation balance less than $500,000 will be allowed to make additional concessional contributions for “unused cap amounts” where they have not reached the concessional contributions cap in previous years. Unused cap amounts will be carried forward on a rolling basis for five consecutive years. Only unused amounts accrued from 1 July 2017 will be available to carry forward. The measure will also apply to members of defined benefit schemes.
The income threshold above which the additional 15% Div 293 tax cuts in for superannuation concessional contributions will be reduced from $300,000 to $250,000 from 1 July 2017.
Currently, individuals above the high income threshold of $300,000 are subject to an additional 15% Div 293 tax on their “low tax contributions” (essentially concessional contributions), effectively doubling the contributions tax rate for concessional contributions.
The extra 15% Div 293 tax does not apply to concessional contributions which exceed an individual’s concessional contributions cap (proposed to be set at $25,000 for all taxpayers from 1 July 2017). Such excess concessional contributions are effectively taxed at the individual’s marginal tax rate. The maximum amount of Div 293 tax payable each year will be limited to $3,750 (ie 15% of the $25,000 cap) from 1 July 2017.
From 1 July 2017, all individuals up to age 75 will be eligible to claim an income tax deduction for personal super contributions. This effectively allows all individuals, regardless of their employment circumstances, to make concessional super contributions up to the concessional cap.
To access the tax deduction, individuals must lodge a notice of intention to claim the deduction (generally before they lodge their income tax return) with their super fund or retirement savings provider. Individuals will be able to choose how much of their contributions to deduct.
Individuals that are members of certain prescribed funds would not be entitled to deduct contributions to those schemes.
Contribution rules for people aged 65 to 74
From 1 July 2017, the government will remove the current restrictions on contributions (ie the minimum work requirements and restrictions on spouse contributions) to superannuation that apply to Australians aged 65 to 74. This announcement will ensure that the same contribution acceptance rules are applied for all taxpayers under the age of 75.