From the 1st of July 2016 Australian residents selling real estate with a market value of $2M or more will need to apply for a clearance certificate from the Australian Tax Office (ATO) to ensure amounts are not withheld from the sale proceeds. If there is no valid clearance certificate provided by settlement, the purchaser is required to withhold 10% of the purchase price and pay this to the ATO.
What does all of this mean?
New withholding rules on sales of property by foreign residents have been introduced at a time when foreign investment in Australia, including in residential real estate, is increasing. The rules will apply where real property contracts are entered into on or after 1 July 2016, but only apply to sales of residential property where that property has a market value of $2 million or more. Withholding does not apply to sales by Australian resident sellers, but these sellers will need to obtain a clearance certificate that they can provide to the purchaser.
The changes were announced in 2013 and became law earlier this year. The ATO has talked to real estate agents, conveyancers and legal practitioners to ensure the industry is prepared to help their clients meet their withholding obligations.
Withholding arrangements to make sure foreign residents pay capital gains tax on the sale of residential property exist in many countries, including in Canada, France, Spain, Japan and the USA.
A clearance certificate, which can be easily downloaded for free from the Australian Government ATO website, confirms that a 10% withholding amount does not need to be withheld from the transaction.
Clearance certificates are valid for 12 months from issue, and must be valid at the time it is made available to the buyer.
Where a buyer fails to withhold when they should, a penalty may be equal to the amount that was required to be withheld and paid. Interest will also be payable.
Sellers can claim the credit for the withheld amount paid to the ATO by lodging a tax return for the relevant year.
How do I apply for a clearance certificate?
Clearance certificate application forms are already available to download through the ATO’s website, and it is designed to be a straightforward process that should not take much time to complete for most sellers.
An online version of the form will be available from 27 June 2016. Where an application is submitted online, most certificates will be issued electronically within a few days. Paper applications may take up to 2-4 weeks to process.
If you are an Australian citizen selling a property on or after 1st July 2016 and the sale price is above $2M, make sure you have a clearance certificate. You will have up until settlement to provide this to the purchaser, so if you are selling by auction and are unsure of the sale price until auction day, that’s ok. If it sells over $2M, apply for the certificate as soon as possible to ensure you will be able to provide it to the purchaser prior to settlement so they do not withhold 10% of the purchase price.
For further detailed information about foreign resident capital gains withholding payments go to ato.gov.au/FRCGW
(source : Australian Government, Australian Tax Office).