The current mess was created when former treasurer Joe Hockey caved into pressures to curb Chinese investment in Australian residential property in 2015. In the process, the treasurer was convinced by the Australian Taxation Office to widen the net to cover local residents.
Parliament was being bombarded with tax legislation at the time and the Canberra politicians did not pick up what the ATO had done.
So, fasten your seats belts for a horror commentary.
I was alerted to the position by one of Australia’s top commercial/tax barristers, John Fickling of WA. I am using many of Fickling’s words in describing what is about to happen.
If you purchase a property worth $2m or more on or after July 1 2016, you will be required to withhold 10 per cent of the purchase price and remit it to the ATO UNLESS the vendor is able to provide a special purpose tax resident’s “clearance certificate” from the ATO. It does not matter if the vendors were born in Australia and have lived all their lives in Australia — unless they have that clearance certificate, they are classed as a foreigner and the buyer must send 10 per cent of the purchase price to the tax office.
In case you think I’m kidding, read the ATO’s exact words: “A vendor who sells the following assets is also a relevant foreign resident, even if they are an Australian resident for other tax purposes.
The definition of property is very wide and includes leaseholds but does not include stock exchange investments. A purchaser who does not receive a “clearance certificate” from the vendor and does not send 10 per cent of the purchase price off to the ATO will still be liable to pay that 10 per cent to the ATO plus, almost certainly, will have to pay severe additional penalties and interest. The economics of buying the property will be severely damaged.
Fickling says all real estate agents selling $2m plus properties should be considering how this new regime will impact on their business and what will be the contractual consequences under the different scenarios that could play out.
For example, banks and other financiers may be affected where their secured debt exceeds 90 per cent of the value of the selling price. In a situation where the owner is being forced to sell, the banks will be better to take possession and sell themselves rather than being caught in the “tax clearance” delays.
To be fair, in the vast majority of cases local resident vendors will have no problem obtaining a “clearance certificate”.
However, for locals it might increase their risk of a tax audit and there are clear hazards for property sellers who:
Have not filed tax returns for many years;
Have filed tax returns, which would indicate they could not afford such a property;
Are selling their residential house at the same time as their neighbours to a single developer, which may give rise to a profit making scheme (such that the principal residence capital gains tax exemption may not apply to the value uplift generated by selling the properties together); or
Where the ATO has gathered information that indicates the vendor is in the business of developing property, which means that the principal residence capital gains tax exemption may not apply.
Fickling says in extreme cases action could potentially be taken by the ATO prior to the sale, to freeze the transaction.
Those who see any of the above as dangers might consider selling in a hurry (before July 1), so there might be some property bargains for buyers in coming weeks.
It’s also important to note that the $2m is “hard-coded” into the legislation, so, as property prices increase, more vendors will be caught. Over time, the ATO may shift their audit target identification processes to $2m-plus property vendors and away from other areas.
Additionally, if the vendor has a tax debt, the application for a “clearance certificate” may in some circumstances involve the ATO seeking to recover some or all of that tax debt from the purchaser by way of a garnishee notice.
At this point, it is worth noting that we are giving the Australian Taxation Office another weapon to recover tax legitimately owed and that is a good thing for society.
The great danger is the complexity created and that currently the tax office is badly run and is operating outside the law in key small business areas. It knows it can’t be challenged because of the cost of court cases.
Meanwhile, the legislation is yet another blow being aimed at Chinese and other Asian investors in property. These blows have come separately and each one has had reasonable motivations. But, in combination, they could inflict severe damage to the apartment and other parts of the residential property market.
Chinese and other Asian investors face a Hobson’s choice. They will not enjoy getting a tax clearance but nor will they appreciate the buyer of their property taking 10 per cent off the purchase price.
And if the tax office treats locals illegally, what might they do to foreigners?
Australia desperately needs greater independent supervision of the tax office.
In case readers imagine that high property prices are confined to large metropolitan areas a quick look at realestate.com.au will dispel that view – within the NSW Northern Rivers there are currently 7 properties in Yamba and environs with a sale value of $2 million and over, 4 in the Grafton area, 6 in Kyogle, 9 in the Lismore region, 35 in the Ballina district, 78 in the Byron Bay greater region and 46 in the Tweed local government area.
