Effective from the 1st of July 2016, the ATO has introduced new tax rules designed to ensure foreign residents meet their capital gains tax liabilities, with a 10% withholding amount to apply to real property sale prices in excess of $2 million where the vendor is not an Australian resident.
This means that Australian residents (for tax purposes) selling real property with a market value of $2 million or more must obtain an ‘ATO Clearance Certificate’ to confirm that the vendor is an Australian resident and the 10% withholding amount does not need to be applied to the transaction. This clearance certificate must be provided to the purchaser by settlement.
As it can be difficult for the purchaser to determine if the vendor is an Australian resident, if the clearance certificate is not received by settlement, the purchaser will be required to withhold 10% of the sales price at settlement and remit this amount to the ATO within 2 business days of settlement occurring
The market value of the property is taken to be the Contract Price less any GST included in the Contract Price for which the buyer is entitled to an input tax credit.
Subsequently, the REIQ contract for Houses and Residential Land (12th edition) has been amended accordingly, with the relevant clause inserted at clause 2.5(3) Payment of Balance Purchase Price as follows:
‘(3) If both the following apply:
a. the market value of the Land and Improvements at the Contract Date is $2,000,000 or more and this sale is not otherwise an excluded transaction under s14-215 of the Withholding Law; and
b. the Seller has not given the Buyer on or before settlement for each person comprising the Seller either:
i. an ATO Clearance Certificate; or
ii. a variation notice under s14-235 of the Withholding Law which remains current at the Settlement Date varying the CGT Withholding Amount to nil,
c. for clause 2.5(1), the Seller irrevocably directs the Buyer to draw a bank cheque for the CGT Withholding Amount in favour of the Deputy Commissioner of Taxation or, if the Buyer’s Solicitor requests, the Buyer’s Solicitor’s Trust Account;
d. the Buyer must lodge a Foreign Resident Capital Gains Withholding Purchaser Notification Form with the Australian Taxation Office for each person comprising the Buyer and give copies to the Seller with the payment reference numbers (PRN) on or before settlement;
e. the Seller must return the bank cheque in paragraph (c) to the Buyer’s Solicitor (or if there is no Buyer’s Solicitor, the Buyer) at settlement; and
f. the Buyer must pay the CGT Withholding Amount to the Commissioner in accordance with s14-200 of the Withholding Law and give the Seller evidence that it has done so within 2 Business Days of settlement occurring.
(4) For clause 2.5(3), the market value of the Land and Improvements is taken to be the Purchase Price less any GST included in the Purchase Price for which the Buyer is entitled to an input tax credit unless:
a. the Property includes items in addition to the Land and Improvements; and
b. no later than 2 Business Days prior to the Settlement Date, the Seller gives the Buyer a valuation of the Land and Improvements prepared by a registered valuer,
in which case the market value of the Land and Improvements will be as stated in the valuation.’
This clause is also reflected in the REIQ Contract for Commercial Land and Buildings (5th edition) at clause 4.2.
The ATO Clearance Certificate is available to download through the ATO website and there is no fee for applications (a solicitor or registered tax agent can apply for the buyer).Clearance certificates are valid for 12 months from issue and must be valid at the time it is made available to the buyer.
Penalties may apply where sellers make false or misleading declarations to the ATO, or where the buyer fails to withhold a portion of the sale price where they should.