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Another shock for Australian property markets



As if Australia’s property markets didn’t have enough to contend with. Consumer confidence is falling pre-election and foreign buyers are pulling out of our markets as banks make it harder to get finance and now the Australian Taxation Office (ATO) has delivered another blow for those dealing with properties valued at more than $2 million.

In a measure to crack down on foreign property owners avoiding foreign capital gains tax obligations, from July 1st 2016 when a foreign resident sells an Australian property (and certain other assets), the purchaser (not the seller) will be required to withhold 10% of the purchase price and pay that amount to the A.T.O.

But before you say “That’s O.K. – it doesn’t apply to me, I’m not a foreign resident”, you may be surprised. All Australian sellers of $2 million plus properties will be classified as overseas investors which means that all buyers of properties worth more than $2 million will have to withhold 10% of the purchase price and rather than giving it to the vendor at settlement and remit this sum to the A.T.O. unless they get a special tax clearance.

No you haven’t misread this. The ATO explains that “a vendor who sells the following assets is also a relevant foreign resident, even if they are an Australian resident for other tax purposes.” A purchaser who does not receive a “clearance certificate” from the vendor and does not remit 10% of the purchase price off to the A.T.O will still be liable to pay that 10% to the A.T.O. plus additional penalties and interest.

Click here to read more from the ATO about foreign resident capital gains withholding.

What’s behind these changes?

Clearly the ATO is concerned that foreign homeowners were selling Australian property and taking the proceeds overseas without paying the appropriate Capital Gains Tax. So now it has transferred some of the responsibility for collecting a portion of the tax to the purchasers of Australian real estate.

For the second year in a row there has been a significant increase in both the number and value of foreign investment proposals in Australia. Nearly 38,000 proposals received approval for investment worth $194.6 billion. This is an increase in value of 16.3 per cent on investment approved in 2013‑14.

These changes will catch more than just foreign buyers.

Of course most real estate transactions currently won’t be caught by these changes because they will be valued at less than $2 million.  The new withholding tax is expected to affect only 2.26% of homes nationally. Sydney, where an estimated 4.5% of homes on the market are worth more than $2 million will be the hardest hit, followed by Melbourne where 2.5% of homes for sale have a price tag of over $2 million. However, it will be more than just foreign residents who may get caught out.

While foreigners won’t be able to get a “clearance certificate”, the vast majority of local residents will have no problem, yet a small group of Australians may increase the risk of a taxation audit when they make themselves known to the A.T.O.

This could affect property sellers who:

  • Have not filed tax returns
  • Have filed tax returns which would indicate that they couldn’t really afford a property worth over $2 million
  • Have outstanding debts to the ATO

Just another blow to foreign investors buying Australian property

Michael Yardney stated “just to make things clear, I have no issue with the ATO collecting taxes due to it, especially if money owed to the Australian system is being funnelled offshore. But let’s not forget that foreign investment in Australian property saved us when the mining investment boom ended by underpinning the development many new high-rise towers in our CBD’s thereby supporting our construction industry and encouraging employment of many of the trade who had previously worked in the mines.”

However, Yardney sees these changes as another disincentive to foreigners investing in Australian real estate. It’s unlikely they’ll appreciate the purchaser of their property taking 10% off the purchase price at settlement.

And this is come at a time when foreign investment is already falling substantially due to:

  • Australian banks restricting lending to foreign buyers.
  • The Chinese government making it harder to take money out of the country
  • The Victorian State Government raising the levy on foreign purchases from 3% to 7% and
  • They’re being slugged by higher processing fees from the F.I.R.B

This new initiative was initially designed to correctly clamp down on foreign property owners who sell Australian homes without paying capital gains tax, but Yardney says he sees it as having the potential to put off more foreign buyers at a time their presence already is waning.

Author: Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.