The foreign resident capital gains withholding tax rules have been in effect since 1st July 2016.
As from this date, Australian residents selling real estate with a market value of more than $2m or more need to apply for a clearance certificate from the Australian Taxation Office (ATO) to ensure the purchaser does not withhold amounts from the sale proceeds.
Where a valid clearance certificate is not provided by the vendor by settlement, the purchaser is required to withhold 10% of the purchase price and pay this to the ATO. Essentially, the clearance certificate is proof by the vendor that they are not a foreign resident.
Stop Press: The Government announced in the 2017-18 budget that the $2m threshold will be reduced to $750,000 from the 1st July. In addition, the amount to be withheld will be increased from 10% to 12.5%.
It is expected that this change will only apply in respect of contracts entered into on or after 1st July 2017. Contracts entered into prior to 30th June 2017 and after 30th June 2016 will have withholding obligations under the current guidelines.
The existing rules from 1st July 2016 had a $2m threshold and therefore did not impact on the majority of purchase and sale settlements.
However, the reduction of this threshold from $2m to $750,000 from 1st July 2017 will mean that many more transactions will fall under this legislation. As a result, there will be a significant increase in the number of transactions where a clearance certificate will be required.
This will not only impact on you as a purchaser, but also as a vendor. Let me explain…
As a purchaser, for contracts entered into from 1st July 2017 with a purchase price exceeding $750,000 ($2m from 1st July 2016 – 30th June 2017), if the vendor does not provide you with a valid clearance certificate, you will be required to withhold 12.5% (10% from 1st July 2016 – 30th June 2017) from the purchase price and remit it to the ATO. Penalties apply for failure to remit.
As a vendor, if you fail to provide a valid clearance certificate to a purchaser on settlement, then the purchaser has an obligation to remit the withholding amount to the ATO (subject to thresholds and remittance percentages outlined above)
Only Australian residents are eligible to apply for a clearance certificate.
Applications can be made online at https://www.ato.gov.au/Forms/Foreign-resident-capital-gains-withholding-clearance-certificate-application-instructions/
Generally, a clearance certificate will issue electronically within days of an application being submitted. If there are data irregularities or exceptions, it could take up to 14-28 days.
This adds another layer of red tape to an already complex business world. Vendors and purchasers of real estate need to be aware of their obligations under this legislation due to the financial implications imposed on them.
If selling, we can prepare the appropriate applications but suggest that you discuss this with your legal advisers first who can provide the appropriate instructions to us. If buying, ensure that your solicitor requests from the vendor a valid clearance certificate prior to settlement to ensure that you meet your obligations. Of course, if the vendor is a foreign resident, you will need to ensure that you withhold and remit to the ATO the required withholding. Failure to do so will result in penalties to you for failure to withhold and remit.