Step One – Determine market value of the property
The relevance of determining the market value of the property is that the foreign resident CGT withholding rules do not apply where the property (when acquired) has a market value of less than $750,000 (or $2 million for contracts entered into between 1 July 2016 and 30 June 2017). Refer to S.14-215(1)(a) of Schedule 1.
In determining the market value of the property, some important considerations to be taken into account include:
- GST – Where a buyer is GST-registered, the market value of the property is reduced by any input tax credits to which they would have been entitled, had the property been acquired solely for a creditable purpose. Refer to S.960-405(1). Accordingly, the market value of the property is generally its GST exclusive purchase price. In contrast, where the buyer is not GST- registered, the market value of the property is generally its GST inclusive purchase price.
TAX TIP – Acquisitions under the margin scheme
A buyer that acquires real property under the margin scheme is not entitled to input tax credits on the acquisition, even if they are GST-registered. Refer to S.75-20 of the GST Act. Accordingly, the market value of a property acquired under the margin scheme is generally its GST inclusive purchase price.
- Settlement adjustments – Disbursements at settlement (e.g., council rates) do not modify the property’s market value.
- Related party dealings – An independent valuation may need to be obtained where a buyer and seller have not dealt with each other on arm’s length terms.
- Multiple buyers and sellers – The market value of the property as a whole (rather than the market value of each buyer’s or seller’s respective interest in the property) is assessed against the $750,000 (or $2 million) de minimis threshold.