One realtor’s panic at foreign buyer crackdown

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From Dixon Family Estate Agents comes an email bomb:

Since 1765, we’ve been told ‘it is a maxim of English law that it is better that ten guilty men should escape than that one innocent man should suffer’. Not, it seems when it comes to real estate transactions, revenue raising and the Australian Tax Office!

A new bombshell ruling from the ATO has reversed a common law principal said to be ‘a cardinal principle’ of Australia’s system of justice – the presumption of innocence. As a consequence, from 1 July, 2016, many will have to suffer so a few don’t escape.

Without proof of Australian Residency, buyers must withhold 10% on settlement.

Suddenly, it is up to us to prove we are Australian residents. Forget the fact you might have been born here, or have lived here for years diligently paying taxes. No-one will believe you now unless you have a document to prove it.

From 1 July, if you want to sell any property worth more than $2 million, you’ll be deemed as a foreign investor unless you have a certificate from the ATO to prove otherwise. It’s an outrage on so many levels.

First, in order to police foreign investment, the ATO is going to presume we are all wrongdoers. Second, the burden of proof rests with us. And third, when so much political rhetoric exhorts reducing red tape, we need now to lodge a 6-page ‘Foreign resident capital gains withholding clearance certificate application’ form before selling the family home.

Effective the day before the federal election, all sellers of $2 million-plus residential and commercial property, and some other property-related assets, will need to obtain and present to the buyer before settlement the aforementioned ATO clearance certificate.

Otherwise, the buyer has to withhold 10% of the purchase price and hand it over to the ATO. Certificates are valid for 12 months, and must be valid at the time it is presented to the buyer.

Either the ATO’s claim they consulted with the real estate industry is a gross exaggeration, or the REIQ hasn’t advised its members, because this new ruling came as a shock.

Of course, as other commentators have also suggested, this is not just about ensuring foreign investors meet their CGT liabilities, as the ATO claims. They are casting the net so wide and drawing us all in because it is really all about closing tax loopholes and plugging tax revenue leaks.

Australian residents only get their certificates if they are model taxpayers in the eyes of the ATO, and are up to date with lodging their tax returns.

Never mind the 80yo self-funded superannuant, whose family has to sell her life-long home to fund nursing care, only to find she hasn’t lodged a return for a few years. Does $200,000 automatically get flicked to the ATO? And how much stress and expense is involved in getting it back?

The ATO will also be able to compare high-end asset ownership with declared earnings (so if you only declared minimal earnings but somehow managed to buy a $3 million house, they’ll nail you).

While we accept wrongdoers need to be brought into line, we still begrudge the imposition on everyone else. And, as lawyers HopgoodGanim were quick to point out, the widely cast net will capture more than might think.

It covers interests in certain types of property, like leases of land, or mining and prospecting licences, permits and authorities. It snares memberships of and shared ownership arrangements in entities whose value is principally derived from Australian real property.

The rules apply to options or rights to acquire any of the above and even transfers and gifts between parties to family law and matrimonial transactions. Individuals, companies, trusts, superannuation funds – virtually any type of entity is drawn in.

Then there are all the questions surrounding valuations, purchase price versus market value, the $2 million threshold and whether GST is included or not.

Conveyancers, solicitors, accountants and valuers must be jubilant at the new business prospects. But the rest of us can only be appalled that real estate is yet again the whipping boy while other asset classes are not targeted.

The withholding obligation does not apply to shares, ie. if “the transaction is on an approved stock exchange”. Already there is no stamp duty on shares (unlike real estate), and now it’s OK to wash money through shares but not property?

With negative gearing also in the crosshairs, the property market seems to be copping it from all directions. Just because authorities have allowed foreign investors to go crazy buying Australian real estate, we are now all to be penalised.

Surely there’s another way that doesn’t put the onus on the innocent and those not liable. Could state stamp duty offices perhaps create a register where residency information is gathered when purchases are made? Or local governments require declarations via rate notices?

We also wonder where this will lead. For now, the threshold is $2 million and it is free to apply for and obtain the required certificate. Down the track, might the threshold drop and fees be applied?

You can’t blame “authorities” for allowing “foreign investors to go crazy buying Australian real estate” and then also blame them for doing something about it.

While there may be better ways to manage it, my only quibble is that it only kicks in at $2 million. Drop it to zero.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.