All $750,000 plus property sales to be caught in ATO audit aimed at overseas investors

An ATO rule was introduced to catch foreign sellers taking money overseas.

But it was applied to all Australian sellers of $2 million-plus properties - and will now cover all sales above $750,000 in an expanded audit which will also catch local hidden black market property sellers.

The rule classifies all sellers as overseas investors unless they get a special tax clearance.

That means that all buyers of $750,000 plus properties must deduct 10 percent from the purchase price and pay that amount to the Australian Taxation Office (ATO) unless the seller can furnish a tax clearance. 

The rule will affect everyone, including Australians, despite being aimed at overseas investors taking their property windfalls overseas.

The measure can be traced back to the days 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.

According to an ATO fact sheet, in May 2013, the government announced that it would introduce a 10 percent non-final withholding tax on payments made to foreign residents who dispose of certain taxable Australian property with a market value above a specified $2 million threshold.

The new legislation for this measure became law in February 2016.

The $2 million rule applied to vacant land, buildings, residential and commercial property, leaseholds and strata title schemes.

The ATO website says, "The government is strengthening our foreign resident capital gains tax (CGT) regime to assist in the collection of foreign residents' liabilities."

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 be liable to pay that 10 percent to the ATO plus

In the majority of cases, local resident vendors will have no problem obtaining a clearance certificate, but it might increase the risk of a tax audit 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.

It was inevitable that over time, the ATO would shift their audit target identification processes to lower than $2 million-plus property vendors.

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. 

In June of last year Property Observer reported on the obligations for seller and buyers for $2 million plus clearance certificates.

Similarly in June last year Property Observer reported on new legislation on the sale of $2 million plus homes.

Property Observer also reported in May last year about the upcoming ATO legislation that will affect sales of $2 million.

Property Observer commented on how the new ATO rule on property deals for $2 million houses will affect Chinese buyers.