Click on this link to read a Australian Financial Review article quoting SME Property Lawyers on the new withholding tax rules affecting property transactions valued $2 Million or more.
From 1 July 2016 all purchasers will need the express right to withhold the 10% if the vendor does not provide a clearance certificate from the ATO confirming the vendor is not a foreign resident. The NSW Law Society has prepared an updated REINSW Contract for Sale (2016 edition) to deal with the new withholding tax rules. But, as with the superannuation reforms, there is an element of retrospectivity. The terms of option contracts are fixed and signed years ago using contract terms that do not allow the purchaser to withhold 10%, but these contracts are still caught by this change. So when an option is exercised, the purchaser may have a legal duty to withhold 10% of the purchase price and pay it over to the ATO, but this will be a breach of contract with the vendor who could refuse to settle unless a 100% is paid.
It is mostly property developers who use options – to accumulate development sites – and will be caught by the retrospective element.
It won’t be an issue where the vendor wants the developer to complete the sale, but say the developer has spent $1M on a DA causing the value of the property to rise. Perhaps the vendor will be motivated to terminate the contract and re-sell at a higher price with the DA to someone else. The developer’s contract terms were decided when the option was signed so he can’t change them. If the developer can’t pay the 100% to the vendor but the contract doesn’t allow him to withhold the 10% then the vendor could refuse to settle and terminate. Or, more likely, take advantage of the trap the developer is caught in to extract some leverage i.e. more cash from the developer.
The ATO has pointed us to certain provisions in a schedule to the Taxation Administration Act that could be used to shelter developers from a breach of contract claim where the breach is required in order to comply with tax law. Our view is that you do not want to have to rely on some obscure provision at the back of tax legislation when near the pointy end of settlement. We hope the ATO will come out with some comfort for developers caught out by this change of law.