Purchasers of Australian land need to be aware of their obligation to deduct Capital gains withholding tax.
Since 1 July 2016, any purchaser (whether or not a resident of Australia) of Australian residential property is obliged to withhold a percentage of the purchase price and make it payable to the ATO at settlement as a capital gains tax withholding. The purchase price threshold and withholding amount may change from year to year.
- For Contracts entered into after 1 July 2016 but before 1 July 2017, the withholding rate is 10% and the value threshold is $2,000,000.00.
- For Contracts entered into after 1 July 2017, the withholding rate is 12.5% and the value threshold is $750,000.00.
There are exemptions for some commercial and agricultural property and vacant land.
The purpose of this is to assist the Australian Taxation Office (‘ATO’) with the collection of foreign tax residents’ Australian tax liabilities and induces foreign tax residents to lodge a tax return at the end of the financial year.
An Australian tax resident Vendor can obtain A Foreign Resident Capital Gains Withholding Certificate (‘FRCGWCC’) from the ATO which says that the Vendor of a property is not a foreign tax resident.
By providing the FRCGWCC prior to settlement of the property, the Vendor proves to the Purchaser that no foreign resident capital gains tax amount needs to be withheld from the purchase price.
When is Foreign Resident Capital Gains Clearance Certificate required?
An FRCGWCC is required whenever a person disposes of certain assets.
The assets subject to the withholding tax are:
- taxable Australian real property with a market value of $750,000 or more;
- an indirect Australian real property interest;
- an option or right to acquire such property or interest.
A foreign resident Vendor can claim a credit for the foreign resident capital gains withholding payment by lodging a tax return for the relevant year once the Purchaser remits the amount withheld to the ATO at settlement.
Not being able to obtain a FRCGWCC is not a valid reason for the Vendor to delay settlement under a standard Contract.
Penalties for non-compliance
There is no penalty for failing to provide a FRCGWCC, other than the Purchaser withholding funds at settlement to pay to the ATO. The Vendor will then need to wait until they lodge their income tax return to claim a credit for the withheld amount.
If the Vendor provides a fraudulent FRCGWCC to the Purchaser and the Purchaser in good faith relies on that FRCGWCC to not withhold any funds at settlement, the Purchaser will not be held liable for non-compliance. A Vendor providing a fraudulent FRCGWCC will be held liable for making a false and misleading statement and may be subject to prosecution.
If a FRCGWCC is not provided, and a Purchaser is obliged to withhold 12.5% from the purchase price but fails to do so, the ATO can impose a penalty of $2,100.00 on the Purchaser for failing to remit the required amount, in addition to the amount that was expected to be withheld. The General Interest Charges (‘GIC‘) will be applicable over and above the penalty amount.
Foreign Tax Residents
In cases where the Vendors are non Tax residents and the capital gains are proven to be less than 12.5% of the purchase price, a Foreign Resident Capital Gains Withholding Variation (Variation) can be applied to reduce the amount to a lesser sum. A Variation can also be sought to reduce the amount to zero if the Property has been sold at a loss.