The number of Australian properties owned by foreign residents has increased, thus as of 1 July 2016, the government has enacted new laws to claw back up to 10 per cent of the sale price for real estate sold by foreign residents at $2m and above, under a Foreign Resident Capital Gains Tax Withholding regime.
Broadly, this applies to all properties. Furthermore, if the purchaser does not receive a clearance certificate prior to settlement, they are required to withhold 10 per cent of the purchase price and remit it to the ATO. Failure to withhold will result in substantial penalties, namely an extra 10 per cent penalty, resulting in payment of 110% of the purchase price by the purchaser.
Who can prepare the forms to apply for a clearance certificate?
It is important to understand that only tax agents, practising solicitors or the taxpayer may complete the forms to apply for a clearance certificate. Conveyancers that are not practising solicitors are not able complete these forms.
What Australian resident vendors should know
If you are selling property with a market value of $2m or above, you will need to apply for a clearance certificate and provide this to the purchaser before settlement to ensure no funds are withheld from the sale proceeds.
This certificate is valid for 12 months. If you fail to provide this certificate by settlement, the purchaser would be required to withhold 10 per cent of the purchase price and pay this to the ATO. These certificates are taking approximately 28 days to be issued, which does not give much time within normal settlement terms. You should apply for a clearance certificate as soon as you place your property on the market, where the price is expected to be at or above $2m.
The ATO has implemented an automated process for issuing a clearance certificate and more information about this can be found on the ATO website.
In the event that a transaction contains multiple vendors, each vendor must obtain their own clearance certificate. A clearance certificate will also be required where a transaction is between members of a tax consolidated group.
Where the vendor is not entitled to a clearance certificate, but believes a withholding is inappropriate, the vendor can apply for a variation and a ‘Variation application for foreign residents and other parties’ form, requesting a lesser withholding rate be determined by the ATO.
What foreign resident vendors should know
The 10% withholding represents a non-final withholding tax and, as such, foreign resident vendors may still be required to lodge an Australian tax return in respect of a gain arising from the disposal of the relevant property, with a credit available in respect of any amount paid to the ATO under these provisions.
How can we assist?
For further information, or for assistance with completion of the clearance certificate application or preparation of a tax return in respect of a relevant property disposal, please contact your Pitcher Partners advisor.
To view some examples of how this regime applies click here.