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Capital gains Withholding: Impacts on Foreign and Australian Residents
Foreign resident capital gains withholding first applied to vendors disposing of certain taxable Australian property (those being over $2 million in contract price) under contracts entered into from 1 July 2016. A 10% non-final withholding was applied to these transactions at settlement. New rules for foreign resident capital gains withholding (FRCGW) apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2017. The changes will apply to real property disposals where the contract price is $750,000 and above (previously $2 million) and the FRCGW withholding tax rate will be 12.5% (previously 10%). The existing threshold and rate will apply for any contracts that are entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017. Background Australian resident vendors selling real property will need to obtain a clearance certificate from the ATO prior to settlement, to ensure they don't incur the 12.5% non-final withholding. This existing withholding legislation assists the collection of foreign residents’ Australian tax liabilities. It imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay it to the ATO where a vendor enters into a contract on or after 1 July 2017 and disposes of certain asset types (or receives a lease premium for the grant of a lease over Australian real property). The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal of the asset. A tax file number (TFN) is required to lodge a tax return; they will need to apply for a TFN if they don't have one. The vendor may claim a credit for any withholding amount paid to the ATO in their tax return.
Australian resident vendors can avoid the 12.5% withholding by providing one of the following to the purchaser prior to settlement:
For Australian real property, a clearance certificate obtained from the ATO
For other asset types, a vendor declaration they are not a foreign resident.
Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding. Please be aware that purchasers must pay the amount withheld at settlement to the Commissioner of Taxation. Asset Types The legislation applies to the following asset types including but not limited to: Real property -
Australian real property with a market value* of $750,000 or more
vacant land, buildings, residential and commercial property
mining, quarrying or prospecting rights where the material is situated in Australia
a lease over real property in Australia.
*Note: In many cases, the market value of a property will be the purchase price. Where the purchase price has been negotiated between the vendor and the purchaser, acting at arm’s length, we will accept the purchase price as a proxy for market value. Excluded assets
Some assets are not subject to the withholding including but not limited to:
taxable Australian real property with a market value of less than $750,000. This ensures the vast majority of residential house sales will be unaffected by this measure
When to obtain a clearance certificate
An entity may apply for a clearance certificate at any time they are considering the disposal of taxable Australian real property. This can be before the property is listed for sale. You should apply for a clearance certificate at least 14 days before you require it. Valid clearance certificate
A clearance certificate is valid for 12 months from the date of issue. It's only valid for the listed vendor and clearance certificate period on the certificate. Vendors must ensure the details on their clearance certificate application are accurate, so the clearance certificate issues in the correct name on the Certificate of Title of the property. Obtain a clearance certificate here... Clearance Certificate
For in depth information on this new legislation please go here... Changes to Capital Gains Withholding
Information provided by the ATO
