What is the Foreign Resident CGT Withholding Scheme?
Legislation was introduced last year to combat low levels of compliance by foreign residents paying tax relating to Australian capital gains.
Under the current law, when a seller disposes of real estate with a market value over $2 million, they are deemed to be a foreign resident and the purchaser of that asset is required to withhold 10% of the purchase price, paying that amount to the Australian Tax Office (ATO), unless the seller provides a clearance certificate.
Last month, the Commonwealth Government introduced significant changes to the current scheme, so that from 1 July 2017 the scheme will apply to the sale of all real estate over the lower market threshold of $750,000. Further purchasers will be required to withhold an increased amount of 12.5% of the purchase price and remit that to the ATO unless the seller provides a clearance certificate.
From 1 July 2017, all local sellers of real estate such as houses, units and land must obtain a clearance certificate or be down 12.5% of the price at settlement, even if you are selling your primary residence.
The Scheme applies to real property with a market value over $750,000.
As a starting point, all sellers of real property with a market value over $750,000 will be deemed to be foreign residents unless and until they obtain a clearance certificate from the ATO and present it to the buyer prior to settlement.
If the seller provides this clearance certificate to the buyer prior to settlement, then no withholding of the purchase price will be required. If the seller fails to provide the certificate, then the buyer must pay the 12.5% withholding tax to the ATO at settlement.
Usually cheques are required at settlement but the ATO will grant the buyer a 2 business day grace period to pay the withholding tax. Lawlab will make arrangements for the withholding tax to be paid, or sent to the ATO immediately after settlement so buyers avoid penalties and interest.
Sellers requiring funds from their sale to purchase another home will need to ensure they have sufficient funds to complete their purchase by having a clearance certificate.
From 1 July 2017, all buyers of real estate such as houses, units and land must withhold 12.5% of the price unless the seller give them a clearance certificate.
It is the buyer’s responsibility to withhold, and pay the withholding tax to the ATO. The buyer may incur significant penalties if they fail to do so (possibly criminal penalties and a civil penalty in the amount they were to withhold) and they may be subject to interest charges if they are late in making the payment to the ATO. Even if the buyer knows that the seller is not a foreign resident, a clearance certificate must still be produced by the seller for the buyer to be free from the withholding obligation.
Only lawyers and tax agents can help a seller obtain a clearance certificate? No, your conveyancer can’t help you.
Property sellers, their lawyer or their tax agents (but not conveyancers), can apply for a clearance certificate at any time before settlement when considering disposing of real property with a market value over $750,000.
Lawlab recommends that a seller apply for the clearance certificate as soon as they decide to sell the property. The ATO has indicated the certificate will usually be provided within days of the application being submitted, however processing times of up to 28 days can be expected for high risk or unusual applications or applications with data irregularities.
What to look for in a clearance certificate?
A clearance certificate relates to a seller and is not property specific. It remains valid for the sale of all assets by that seller for a period of 12 months. If there is more than one seller, the buyer must ensure that a clearance certificate has been provided by each seller. The clearance certificate must be valid at the time it is provided to the buyer. A clearance certificate cannot be applied for retrospectively. If the seller is not entitled to a clearance certificate but believes a withholding of 12.5% is inappropriate, then they can apply to the ATO for a variation.
Example 1 – No clearance certificate
On 1 August 2017, Mrs Jones enters into a contract to purchase an apartment in Sydney for $1m, with settlement proposed to occur on 12 September 2017. Mrs Jones does not know whether the seller is a foreign resident. Despite many requests from Mrs Jones’ lawyer, the seller refuses to obtain a clearance certificate from the ATO. As Mrs Jones is acquiring real property with a market value greater than $750,000 then, in the absence of a clearance certificate being provided by the seller prior to the settlement date, Mrs Jones will be required to withhold and pay to the ATO the sum of $125,000 (representing 12.5% of the purchase price). Whether or not the seller is an Australian resident does not alter Mrs Jones obligation to withhold.
Example 2 – Sale by Auction
Mr Smith decides to sell his family home in the outer suburbs in Melbourne. After speaking with his Real Estate Agent, who has advised him that similar properties in the area have recently sold for approx. $800,000, Mr Smith decides to auction the property and he sets the reserve price at $720,000. Now, using a little common sense, Mr Smith can determine that the chances of him obtaining over the reserve price and beyond a $750,000 sales price are extremely high. In this situation, the ATO advises Mr Smith to err on the side of caution and apply for a clearance certificate before he puts his home on the market. If the property does indeed sell for over $750,000 then Mr Smith has avoided the possibility of not being able to obtain the clearance certificate in sufficient time before the settlement date.
We expect that new versions of the standard form contracts will be released in most states by 1 July 2017 to accommodate these changes but if not then lawlab will insert the special conditions that need to be added to contracts until standard contracts are updated.