The Federal Government has introduced a bill to amend the current Foreign Resident Withholding Tax (FRWT) regime, which will affect contracts of sale entered into on or after 1 July 2017.
The changes include:
- the threshold for real property disposals lowering from $2 million to $750,000; and
- increasing the withholding rate from 10 per cent to 12.5 per cent of the purchase price.
As the threshold has now been lowered, the FRWT regime will expand to more property transactions, particularly residential property transactions.
The purpose of the FRWT regime is to ensure foreign resident vendors pay their capital gains tax liability on the sale of Australian real property.
Under the FRWT regime, if the purchase price is equal to or greater than the prescribed threshold amount, purchasers are required to withhold part of the purchase price and remit that amount to the Australian Taxation Office (ATO) as payment of capital gains tax on behalf of the vendor. For any contract entered into on or after 1 July 2017, the threshold amount is to decrease from $2,000,000 to $750,000. The threshold amount includes any GST which the purchaser is not entitled to an input credit for.
For any contract entered into on or after 1 July 2017, the amount to be withheld will increase from 10 per cent of the purchase price to 12.5 per cent of the purchase price.
The purchaser’s obligation is discharged if the vendor obtains a valid `Clearance Certificate’ from the ATO. The Clearance Certificate will only be issued to a vendor that is not a foreign person for taxation purposes.
Where the vendor is a foreign person, the purchaser must retain 12.5 per cent of the purchase price and pay that amount to the ATO at settlement, unless the vendor provides a ‘Variation Notice’, in which case the purchaser must only remit the amount stated in the Variation Notice. A foreign person can obtain a Variation Notice from the ATO if they satisfy the ATO that a lower amount of withholding applies to the transaction.
The FRWT provisions also apply to indirect Australian real property interests (for examples shares in a company or units in a trust where certain conditions are met) and options to acquire real property. In these circumstances, if the vendor is not a foreign person for taxation purposes, a vendor declaration is required stating that they are not a foreign person to avoid any withholding tax being remitted to the ATO. The Vendor Declaration form can be obtained from the ATO website.
From 1 July 2017 all vendors that are not foreign persons for taxation purposes should be obtaining Clearance Certificates from the ATO if they believe the market value of their property is equal to or greater than $750,000. Delays in obtaining a Clearance Certificate could result in 12.5 per cent of the purchase price being withheld by the purchaser and remitted to the ATO at settlement. It will then be up the vendor to satisfy the ATO that there is no capital gain arising from the sale of the property, or the capital gain liability is less than the 12.5 per cent remitted to the ATO.
A Clearance Certificate can be obtained by submitting an application through the ATO website. The Clearance Certificate will be valid for a period of 12 months from the date of issue and will apply for any properties sold by that vendor during that time.
Special conditions should be included within the contract of sale to comply with the legislation and protect both parties to the transaction, even if the FRWT regime does not apply.