The Australian Government has announced changes to the capital gains withholding rate and threshold for foreign residents. The impact of these changes will affect a considerably larger volume of property transactions and individuals involved with buying or selling property as at 1 July 2017.
The regime first came into effect on 1 July 2016 to aid the collection of capital gains tax liabilities owed by foreign residents and to address compliance issues by foreign residents with their Australian tax obligations.
Where a foreign resident disposes of particular taxable Australian property, the purchaser is required to withhold an amount from the purchase price and pay that amount to the Australian Taxation Office (ATO). The amount is currently 10% of the purchase price on properties with a sale price on or above $2 million.
For contracts entered into on or after 1 July 2017, the threshold price will reduce to properties with a price on or greater than $750,000.00 and the withholding threshold will increase to 12.5% of the purchase price. This means a larger proportion of residential property sales in Australia will be affected by these changes noting the threshold amount is now closer towards the medium Australian house price.
Effect of the withhold tax regime
As at 1 July 2017, when a foreign investor sells Australian property which has a price of $750,000.00 or greater, the purchaser may be required under the changes to withhold 12.5 percent of the sale price at settlement on behalf of the seller and to pay this amount to the ATO.
Provision of a withholding clearance certificate by the seller to the purchaser prior to settlement will obviate the purchaser’s obligation to withhold the tax. In the event the certificate is not provided, the purchaser will not only have statutory but also contractual obligations to withhold the tax and remit the same to the ATO.
Contracts of Sale will impose obligations on the purchaser including strict time stipulations and it is important for the seller, purchaser and real estate agent alike to be aware of the obligations of the contracting parties and the impact this may have on a property settlement.
Clearance certificates are specific to a particular entity and are valid for 12 months. To avoid settlement complications or delays the ATO are urging sellers to obtain a clearance certificate when they first consider selling their property.
Where sellers are foreign residents, they can apply to the ATO for a variation notice which may reduce the required withholding amount and they should attend to this as early as possible as it can take up to 28 days for the variation decision to issue.
If you want further information on the withholding tax regime or the impact of the changes on your transaction, please do not hesitate to contact our Partner, Ben Marino or our conveyancing manager, Kerrie Clare from Marino Law.
