The Federal Government’s crackdown on foreign residents not paying CGT is set to expand following the budget announcement that the relevant threshold for withholding will drop to $750,000 from 1 July 2017.
This means, procedurally at least, more Australian residents will be affected by those laws in their real estate transactions.
This article provides a brief outline of the position as it affects those transactions.
Where a foreign resident (for income tax purposes) disposes of Australian real estate, they are subject to a withholding tax.
In 2016, legislation was introduced to place the obligation on the buyer to withhold that amount from the purchase price where the price is $2 million or above, and pay it to the ATO following settlement. That threshold will now drop to $750,000 (from 1 July 2017) which will capture a greater percentage of property transactions. The withholding tax rate will also increase to 12.5% (currently 10%).
Australian resident sellers deemed to be foreign
All sellers of properties over the threshold (whether foreign or Australian residents for income tax purposes) are effectively deemed by the legislation to be foreign residents. Therefore, the withholding obligation applies even where the seller is an Australian resident unless they obtain a clearance certificate from the ATO and provide it to the buyer before settlement.
Clearance certificates are specific to a particular entity and are valid for 12 months. They can also apply to multiple transactions during those 12 months. This will be particularly useful for developers who may have hundreds of settlements in a short period of time following completion of a development.
Where a seller is actually a foreign resident, they can apply to the ATO for a variation notice which reduces the required withholding amount (in some cases, to nil). The following are examples of circumstances where it may be appropriate for a variation:
- where the seller will make a capital loss
- where there will be insufficient funds to pay out a mortgage.
In the absence of a clearance certificate or variation notice, buyers must remit the full amount of the withholding tax to the ATO from the sale proceeds. Penalties may apply for non compliance.
Time will also need to be allowed before settlement to lodge a payment notification form with the ATO so payment reference numbers are available by settlement.
Clearance certificates will become a common pre-settlement procedure following the reduction in the withholding threshold.
As a clearance certificate is valid for 12 months, a seller can apply to the ATO for one early in the sale/marketing process and we recommend sellers do this, to minimise the risk of funds being withheld from their sale proceeds.
The lack of a clearance certificate may lead to settlement delays or (worse) mean there are insufficient funds available at settlement to payout the mortgage on the property risking the contract falling over, especially in a falling market.