The sale and purchase of residential land (which includes vacant land used for residential purposes) has become more complex due to the tax laws affecting land:
- acquired for a creditable purpose (GST obligations might apply); and
- sold for more than $750,000.00 (ATO tax obligations apply).
GST Withholding Tax
The GST amendment was introduced to ensure that builders/developers would not circumvent their obligations to pay GST on the supply of property on which GST is payable. In effect, developers cleverly avoided paying $3 billion in tax, hence the amendment.
Briefly put, if a buyer is registered for GST and is acquiring the land for a creditable purpose (eg. a builder who is registered for GST and buying for the purpose of building a house in the ordinary course of business) the buyer must disclose that in the contract.
Whilst GST has always been payable on sales of new residential premises and potential residential land, this change means that instead of asking the seller to make sure that the GST is paid to the ATO upon the sale of a property the buyer is now tasked with that job.
For anyone looking to buy or sell a residential property who does not comply with the GST withholding law significant monetary penalties will apply.
If a buyer forgets or fails to withhold and pay to the ATO the required GST amount then the buyer can be liable for a penalty that matches the GST amount that should have been remitted. Also, if the seller fails to notify the buyer of the need to withhold GST harsh financial penalties can be imposed on the seller as well – $21,000 for individuals and up to $105,000 for corporations.
Having regard to the above we would suggest anyone looking to buy or sell to seek appropriate legal advice in relation to their respective obligations prior to entering into a contract.
The intent of the legislation was to ensure that foreign residents paid capital gains tax and did not avoid their obligations to do so.
As a result, all real property disposals where the contract price is more than $750,000 require the seller of the property to obtain an ATO clearance certificate.
If a seller does not provide the buyer with an ATO clearance the buyer is obligated to withhold 12.5% of the purchase price and pay the amount withheld to the ATO.
Remarkably a seller is effectively deemed to be a relevant foreign resident unless the seller provides the buyer with either:
- a valid clearance certificate in transactions involving taxable Australian real property or indirect Australian real property company title interests (even if the seller is actually an Australian resident for other income tax purposes) or
- a valid vendor declaration in transactions involving other assets covered by foreign resident capital gains withholding law.
The takeout from the above is if you are selling residential property for more than $750,000 you must obtain a valid ATO clearance certificate.