Issue Number 31
July 2017

Changing landscape in Australia for foreign Investors/Developers

Foreign investors and Australian vendors need to be aware of the recent changes impacting the direct and indirect sale of real property in Australia.  In 2006 Tax Legislation was introduced to promote foreign investment into Australia in the form of providing an exemption from capital gains tax (CGT) on Australian shares or unit investments where the respective companies or trusts do not principally hold taxable Australian real property (TARP). 

The taxation of real property does not escape CGT where either a foreigner has a direct or indirect interest of 10% or more in TARP. However, an indirect interest held by foreigners in both Australian and foreign entities will only be subject to Australian CGT where at least 50% of the values of the entities’ assets are attributable to underlying Australian real property (the ‘principal asset test’); or the assets have been used in carrying on a business through an Australian permanent establishment (i.e. development activities may qualify).

With effect from Budget night on 9th May 2017 the ‘principal asset test’ includes the entity being disposed of and its associates, to prevent foreign residents disaggregating indirect tax interests in Australian property interests to access the exemption.

From 1 July 2016 where a foreigner disposed of TARP, or an interest of 10% or more in an entity that has an underlying value principally derived from TARP, the vendor has an obligation, remitted to the ATO by the purchaser, a non-final withholding tax (foreign-resident capital gains withholding (FRCGW)) of 10% of the purchase price of $2 million or more.

As a result, the non-resident would be required to lodge an Australian tax return to determine the actual net capital gain made on the sale, taking into account the original purchase price, buying and selling costs etc which may result in a tax liability of less than the FRCGW.

The existing threshold and rate will apply for contracts that were entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017.  From 1 July 2017 the FRCGW withholding rate is 12.5% for real property disposals where the contract price is $750,000 and above.

Australian resident vendors and businesses selling real property for a consideration of $750,000 or more will need to obtain a clearance certificate from the ATO prior to settlement to ensure that they do not themselves incur the 12.5% non-final withholding obligation.

As well as obtaining foreign investment approval with the Foreign Investment Review Board (FIRB) the Government will introduce a charge on foreign owners of residential property where the property is not occupied or genuinely available for rent on the rental market for at least 6 months per year.

Please contact your McLean Delmo Bentleys Advisor for further assistance.

Sharon Winter
Tax Partner

Important: This is not advice. Clients should not act solely on the basis of the material contained in this newsletter. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly.

We therefore recommend that our formal advice be sought before acting in any of the areas. This document is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval.

Liability limited by a scheme approved under Professional Standards Legislation