Announcements in the 2017 Federal Budget mean the Foreign Resident Capital Gains Tax Withholding Regime will affect a significantly greater number of real property transfers in Australia
Existing State of Play
Currently, under the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015 (“the Act”) any purchaser who purchases real property with a market value of $2 million or more (GST inclusive) from a foreign resident is required to withhold 10% of the purchase price for payment to the ATO rather than the vendor.
In order to avoid having the funds withheld, vendors who are not foreign residents for tax purposes (or their authorised representatives) must apply and obtain a “clearance certificate” from the ATO certifying that they are an Australian tax resident.
In the event that a certificate is not obtained the vendor will be deemed a foreign resident for the purposes of the transaction.
Subject to the legislation being passed, the proposed changes, as announced in the 2017 Federal Budget, are as follows:
- the threshold “market value” (typically the contract price) will fall from $2 million to $750,000. The GST treatment of the property sale may impact the “market value”; and
- the required withholding rate will increase from 10% to 12.5% of the market value.
When do the changes come into effect?
The changes are to apply to any contract entered into on or after 1 July 2017.
The lowering of the threshold contract price to $750,000 will mean more residential and commercial property sales will be subject to the Act. Some industry professionals have estimated, Australia wide, currently only approximately 11 per cent of real property transfers are caught under the existing threshold, but from 1 July this could increase to approximately 64 per cent of property sales.
The changes could have significant consequences for vendors who may have financial obligations contingent on settlement.
What to do?
Vendors will need to ensure that they apply for a clearance certificate well in advance of the settlement date under the Contract. Current experience is that an application may receive a certificate within 7 days. However the application may, in some instances, take 14-28 days if not longer, depending on review by the ATO.
Therefore, purchasers will need to ensure in the event they are not provided with a clearance certificate that they comply with their obligation to withhold 12.5% of the purchase price and file a purchaser payment notification with the ATO. Failure to do so may result in the purchaser being liable for penalties and interest on late payment.
It is also recommended that purchasers ensure any contracts they enter into contain various provisions, including a clause requiring the vendor to provide a valid clearance certificate (if applicable) prior to settlement.
If you require any assistance regarding the current Foreign Resident Capital Gains Tax Withholding Regime, its proposed changes, or applying for a clearance certificate, please do not hesitate to contact Sam Richardson or our team.