August 3, 2017

Changes to Capital Gains Withholding Tax (Property Transactions) – Impact on Foreign and Australian Residents


New rules apply from 1 July 2017 to the sale and purchase of property above a contract price of $750,000 (practically affecting all property sold in Sydney). The changes require all Australian resident vendors selling property to obtain a clearance certificate from the ATO. Failure to do so imposes an obligation on purchasers to withhold 12.5% of the purchase price to pay to the ATO. /p>

These changes are aimed to ensure that at foreign investors are not able to avoid paying capital gains tax liability on disposal of Australian property investment. For Australian citizens and residents, this is a simple application process with the ATO, which should generate a clearance certificate promptly and which is valid for 12 months. Where a valid clearance certificate is provided, the purchaser is not required to withhold for the vendor listed in the clearance certificate. If the vendor fails to provide the clearance certificate by settlement, the purchaser is required to withhold 12.5% of the purchase price. If the purchaser fails to withhold when they should, a penalty may be imposed by the Tax Commissioner, equal to the amount that was required to be withheld and paid, together with interest charges.

For the foreign resident vendor, there is no point in lodging an application for a clearance certificate. Instead, they 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) and the vendor may claim a credit for any withholding amount paid to the ATO in their tax return.

The capital gains withholding tax threshold was previously set at $2 million with a 10% withholding, which will still apply for any contracts that are entered between 1 July 2016 and 1 July 2017, even if they are not due to settle until after 1 July 2017.

Vendors can apply for a variation where:

  • they’re not entitled to a clearance certificate;
  • a vendor’s declaration is not appropriate; or
  • 12.55% withholding is too high compared to the actual Australian tax liability on the sale of the asset.

Reasons for a variation include:

  • the vendor will not make a capital gain on the transaction (for example, because they will make a capital loss or a CGT roll-over applies);
  • the vendor will not have an income tax liability (for example, because of carried-forward capital losses or tax losses);
  • a creditor of the vendor has a mortgage or other security interest over the property, and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures; or
  • a creditor acquires legal title to the property (that is, becomes the purchaser) as a result of an order for foreclosure, and its security would be further diminished as a result of having to comply with the withholding obligation.

We hope that this Property Law update has been useful to you, and if you have any queries, please do not hesitate to contact us.

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