Currently, where a foreign resident disposes of an interest in Australian real property, a gain from the disposal is subject to tax in Australia on an assessment basis.
In recent cases, the ATO has been willing to seek orders from the Federal Court freezing the Australian assets of a foreign entity if a ‘debt’ owing to the ATO is believed to be unsatisfied because the assets of the debtor (or another person) will either be removed from Australia or disposed of, dealt with or diminished in value (see FCT v Regent Pacific Group Limited & Ors  FCA 36]. However, as the Federal Court described, this collection mechanism is 'draconian’.
The proposals focus on the collection mechanism as opposed to whether or not a particular gain should be assessed. That is, once an assessment and a tax liability has been determined under the tax law, the new withholding system will apply to collect the tax.
The proposal raises a few issues such as which is the right entity that should ‘withhold’ the tax from the sale proceeds. If the withholding obligation is on the purchaser, a purchaser is unlikely to know the tax residency status of the vendor. If the purchaser is a foreign resident of Australian real property interests, how difficult will it be to enforce the withholding obligation? Will some type of ‘declaration’ need to be made to disclose the vendor’s tax residency status before a withholding obligation is triggered?
There are a number of practical design and implementation issues that need to be thought through. Hopefully, a 1 July 2016 start date allows enough time for new measures to be properly consulted on and implemented.